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Chapter 5: 12BP (page 451)

Becker Brothers is the managing underwriter for a 1.45-millon-share issue by Jay鈥檚 Hamburger Heaven. Becker Brothers is 鈥渉andling鈥� 10 percent of the issue. Its price is \(27 per share, and the price to the public is \)28.95.

Becker also provides the market stabilization function. During the issuance, the market for the stock turns soft, and Becker is forced to purchase 50,000 shares in the open market at an average price of \(27.50. It later sells the shares at an average value of \)27.20.

Compute Becker Brother鈥檚 overall gain or loss from managing the issue.

Short Answer

Expert verified

The net gain earned by Becker Brothers is $267,750

Step by step solution

01

Computation of amount of spread

Spread=Publicprice-Nettocorporation脳Numberofshares=$28.95-$27脳10%脳1.45million=$1.95脳145,000=$282,750

02

Computation of loss on forced purchase

Loss=Numberofshares脳Purchaseprice-Sellingprice=50,000脳$27.50-$27.20=50,000脳$0.30=$15,000

03

Computation of overall gain or loss

Overallgain=Amountofspread-lossonforcedpurhase=$282,750-$15,000=$267,650

Hence, the net gain from managing the issue is $267,750

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Most popular questions from this chapter

Explain the role of financial intermediaries in the flow of funds through the three-sector economy.

The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders鈥� claims are also shown.

Assets

Book value

Liquidation value

Accounts receivables

\(1,400,000

\)1,200,000

Inventory

\(1,800,000

\)900,000

Machinery and equipment

\(1,100,000

\)600,000

Building and plant

\(4,200,000

\)2,500,000

Total assets

\(8,500,000

\)5,200,000

Liabilities and stockholder鈥檚 claims

Liabilities

Accounts payable

\(2,800,000

First lien, secured by machinery and equipment

\)900,000

Senior unsecured debt

\(2,200,000

Subordinated debenture

\)1,700,000

Total liabilities

\(7,600,000

Stockholder鈥檚 claims

Preferred stock

\)250,000

Common stock

\(650,000

Total stockholder鈥檚 claims

\)900,000

Total liabilities and stockholder鈥檚 claims

\(8,500,000

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d. Determine what rate of return must be earned on the net proceeds to the corporation so there will not be a dilution in earnings per share during the year of going public.

Corporate debt has been expanding very dramatically in the last three decades. What has been the impact on interest coverage, particularly since 1977? (LO16-1)

Question: The Bowman Corporation has a \(18 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to 8.5 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 9 percent call premium on the old issue. The underwriting cost on the new \)18,000,000 issue is \(530,000, and the underwriting cost on the old issue was \)380,000. The company is in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded after-tax cost of debt) to analyze the refunding decision.

a. Calculate the present value of total outflows.
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