Chapter 20 – Problem 20 – 1
Profit or Loss on New Stock Issue
Security Brokers Inc. specializes in underwriting new issues by small firms. On a recent offering of Beedles Inc., the terms were as follows:
Price to public $5 per share
Number of shares 3 million
Proceeds to Beedles $14,000,000
The out-of-pocket expenses incurred by Security Brokers in the design and distribution of the issue were $300,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price?
• a.$5 per share
Gross Proceeds 3,000,000 x 5 = 15,000,000
Net Profit 15,000,000 – 14,000,000 – 300,000 = 700,000

b. $6 per share

Gross Proceeds 3,000,000 x 6 = 18,000,000
Net Profit 18,000,000 – 14,000,000 – 300,000 = 3,700,000

• c.$4 per share

Gross Proceeds 3,000,000 x 4 = 12,000,000
Net Profit 12,000,000 – 14,000,000 – 300,000 = -2,300,000

Chapter 20 – Problem 20 – 2
Underwriting and Flotation Expenses
The Beranek Company, whose stock price is now $25, needs to raise $20 million in common stock. Underwriters have informed the firm’s management that they must price the new issue to the public at $22 per share because of signaling effects. The underwriters’ compensation will be 5% of the issue price, so Beranek will net $20.90 per share. The firm will also incur expenses in the amount of $150,000.
How many shares must the firm sell to net $20 million after underwriting and flotation expenses?
20,000,000 = 20.90x – 150,000
20,150,000 = 20.90 x x = 964,115

Bond Refunding Problem - Thompson Enterprises Thompson Enterprises has $5,000,000 of bonds outstanding. Each bond has a maturity value of $1,000, an annual coupon of 12.0%, and 15 years left to maturity. The bonds can be called at any time with a premium of $50 per bond.

If the