Q12BP Becker Brothers is the managing ... [FREE SOLUTION]

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 5: Q12BP (page 496)

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.

Expert verified

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

Spread = (Public price - Net to corporation) 脳 N u m b e r of shares = ($ 28.95 - $ 27) 脳 (10 % 脳 1.45 m illion) = $ 1.95 脳 145, 000 = $ 282, 750

Loss = Number of shares 脳 (Purchase price - Selling price) = 50, 000 脳 ($ 27.50 - $ 27.20) = 50, 000 脳 $ 0.30 = 15, 000

Overall gain =Amount of spread -Loss on forced purchase = $ 282, 750 - $ 15, 000 = $ 267, 750

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

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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