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Chapter 5: Q9BP (page 496)

Walton and Company is the managing investment banker for a major new underwriting. The price of the stock to the investment banker is \(23 per share. Other syndicate members may buy the stock for \)24.25. The price to the selected dealers group is \(24.80, with a price to brokers of \)25.20. Finally, the price to the public is $29.50.

  1. If Walton and Company sells its shares to the dealer group, what will the percentage return be?
  2. If Walton and Company performs the dealer鈥檚 function also and sells to brokers, what will the percentage return be?
  3. If Walton and Company fully integrates its operation and sells directly to the public, what will its percentage return be?

Short Answer

Expert verified
  1. Percentage return is 7.83%
  2. If stocks are sold to brokers, the percentage return will be 9.57%.
  3. If stocks are directly sold to the public, the percentage return would be 28.26%.

Step by step solution

01

Computation of percentage return

Percentage return=Dealer group's price-Investm ent banker's priceInvestm ent banker's price脳100=$24.80-$23$23脳100=S1.80S23脳100=7.83%

If Walton and Company sold stock to the dealer group, its percentage return would be 7.83%.

02

Computation of percentage return if dealer and broker function is performed

Percentage return=Broker'sprice-Investm ent banker's priceInvestm ent banker's price脳100=$25.20-$23$23脳100=$2.20$23脳100=9.57%

If Walton and Company sold stock to brokers, its percentage return would be 9.57%.

03

Computation of percentage return if the company directly sells to the public

Percen tage return=Public price-Investment banker's priceInvestm ent banker's price脳100=$29.50-$23$23脳100=$6.50$23脳100=28.26

If Walton and Company sold stock directly to the public, its percentage return would be 28.26%.

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