Question

DRK, Inc., has just sold 150,000 shares in an initial public offering. The underwriter’s explicit fees were $90,000. The offering price for the shares was $52, but immediately upon issue, the share price jumped to $60.50.

a. What is the total cost to DRK of the equity issue?

Total cost            $

b. Is the entire cost of the underwriting a source of profit to the underwriters?

	Yes
	No

Answer 1

(a)- Total cost to DRK of the equity issue

total cost to DRK of the equity issue = underwriter’s explicit fees + Increase in the offering price for the shares

= $90,000 + [150,000 Shares x ($60.50 - $52.00)]

= $90,000 + [150,000 Shares x $8.50 per share]

= $90,000 + $12,75,000

= $13,65,000

“Hence, the Total cost to DRK of the equity issue = $13,65,000”

(b). Is the entire cost of the underwriting a source of profit to the underwriters?

“NO”. The underwriters would not take part of the costs of the underwriting as a source of profit to the underwriters.