Question

Reliant Underwriters has agreed to a firm commitment underwriting in which they will pay $36.75 million in exchange for 3 million shares of stock for an IPO offering. The offering price is expected to be $13.50 a share. How much will the underwriters earn if all of the shares can be sold?

		$1.25 million
		$2.75 million
		$3.75 million
		$4.25 million
		$4.50 million

Answer 1

Amount received by selling all 3 million shares = expected price per share x total number of shares

=$13.50 x 3 million

=$40.5 million

Amount the underwriter agreed to pay for 3 million shares = $36.75

Amount the underwriter will earn if all shares are sold = Amount received by selling all shares - Amount the underwriter agreed to pay for all shares

= $40.5 million - $36.75 million

= $3.75 million (option 3)

Do let me know in the comment section in case of any doubt.