1.Why is it important that in an underwriting the investment banker does not overvalue (overprice) or undervalue (underprice) the securities? If the securities are overpriced or underpriced, who suffers the loss?
Discuss with illustrations
Suppose value of a issuer company share is $100. And, underwriter values stock at 95 and 105 in two scenarios. Then loss is:
Particulars | Under | Over |
Stock price | 100 | 100 |
Less: valuation | (95) | (105) |
Under/ (over) valuation | 5 | (5) |
Loss suffered by | Issuer | Underwriter |
If stock is undervalued then underwriter benefits but issuer suffers the loss.
If stock is overvalued then underwriter suffers the loss.
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