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 $270,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price? Round your answers to the nearest dollar. Loss should be indicated by a minus sign.

1. $4.75 per share?

   $  

2. $6 per share?

   $  

3. $3.5 per share?

   $  

Answer 1

The profit or loss is computed as shown below:

a. Price to public x number of shares - Proceeds to Beedles - out of pocket expenses

= $ 4.75 x 3,000,000 - $ 14,000,000 - $ 270,000

= - $ 20,000

b. Price to public x number of shares - Proceeds to Beedles - out of pocket expenses

= $ 6 x 3,000,000 - $ 14,000,000 - $ 270,000

= $ 3,730,000

c. Price to public x number of shares - Proceeds to Beedles - out of pocket expenses

= $ 3.5 x 3,000,000 - $ 14,000,000 - $ 270,000

= - $ 3,770,000

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