Question

1. Salza Corp. is a public corporation plans to issue/sell new shares in order to finance new project. The company is currently evaluating a proposal of signing a contract with an investment bank to act as an underwriter to handle and facilitate the issuing process. The company prefers to guarantee the sale of the total number of issued shares to collect the needed amount of money.

a. What type of financial institution can act as an underwriter?

b. What type of share offering will take place? IPO of seasoned offering?

c. Should the underwriter act as a distribution agent or as a principal in this case?

Answer 1

1. a. Large Financial Institutions can act as an underwriter like Banks, Insurance companies , Investment Banks, etc that can provide guarantee payment in case of damage or any financial loss. They also accept the financial risk and earn commission by this.

1. b. The share offering that will take place would be SEASONED OFFERING as SALZA CORP. is a public corporation and is already registered and decides to raise additional capital for a new project.

1.c. Underwriter acts as a distribution agent as the it earns underwriting commission on sale of shares ( he garunteed to the company i.e. Principal). The principal here is the company that issued the shares but just to promote sales, contracts with agent to lower the financial risk.