Ethanol Lawn Mowers issued 500,000 shares to the public. The gross proceeds were $31,250,000 and the net proceeds were $30 million. Merrel Bench was the lead underwriter and deal negotiator, but 10 other investment bankers (one of which was Golden Sax) were also used to put up capital and help sell the issue. Which of the following statements is/are correct?
I will help you with it. Let’s understand it with examples as listed below
Statement 1 is correct. Gross proceeds are the price at which an Investment bank resells shares to the public.
So in this case, the price paid per share by shareholders is computed as gross proceeds divided by no of shares issues, ie, 31,250,000/500000 = $62.50, making statement one correct.
Statement 2 is Incorrect as the Originating house, in this case, is Merrel Bench, who is directly negotiating with Ethanol Lawn (Issuing company) on behalf of the syndicate. The Golden Sax is a part of the syndicate banks here. These syndicate banks are nothing but the other banks who come together to sell this issue.
Statement 3 is incorrect as the Spread per share (Also called as underwriters spread) is 2.50, which is the difference between what the shareholder paid, 62.5, and what the company received, i.e., 60 (30 million proceeds divided by 500,000 shares issued)
Statement 4 is correct as Merrel Bench is the sole book-running manager or Lead Bank that is negotiating with the issuer on behalf of the syndicate.
Statement 5 is also correct as this is a syndicated deal, as seen by the number of syndicate banks involved. These syndicate banks are nothing but the other banks who come together to sell this issue. It helps companies broaden their reach, increasing the probability of successful placement.
Please let me know if there is any confusion over the concepts. I will be happy to answer them.
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