Question

Profit or Loss on New Stock Issue

Security Brokers Inc. specializes in underwriting new issues by small firms. On a recent offering of Beedles Inc., the terms were as follows:

Price to public	$5 per share
Number of shares	3 million
Proceeds to Beedles	$14,000,000

The out-of-pocket expenses incurred by Security Brokers in the design and distribution of the issue were $230,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price?

$5 per share? Use minus sign to enter loss, if any.
$   

$7 per share? Use minus sign to enter loss, if any.
$   

$3.75 per share? Use minus sign to enter loss, if any.
$  

Answer 1

Profit / Loss = Price per share x total shares - Proceeds to Betel - Out of pocket expense

.

a.

Profit / Loss in case of $5 per share:

Profit / Loss = $5 x 3,000,000 - $14,000,000 - $230,000

Profit / Loss = $770,000

.

b.

Profit / Loss in case of $7 per share:

Profit / Loss = $7 x 3,000,000 - $14,000,000 - $230,000

Profit / Loss = $6,770,000

c.

Profit / Loss in case of $3.75 per share:

Profit / Loss = $3.75 x 3,000,000 - $14,000,000 - $230,000

Profit / Loss = - $2,980,000