Question

Becker Brothers is the managing underwriter for a 1.65-million-share issue by Jay’s Hamburger Heaven. Becker Brothers is “handling” 10 percent of the issue. Its price is $22 per share, and the price to the public is $24.50.

Becker also provides the market stabilization function. During the issuance, the market for the stock turns soft, and Becker is forced to purchase 75,000 shares in the open market at an average price of $23.00. It later sells the shares at an average value of $22.50.

Compute Becker Brothers’ overall gain or loss from managing the issue. (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

Answer 1

Total spread = (Public price - Net to corporation) * Number of shares
= ($24.50 - $22) * (1,650,000 * 10%)
= $2.50 * 165,000
= $412,500.

Loss = (Purchase price - selling price) * Number of shares
= ($23 - $22.50) * 75,000
= $0.50 * 75,000
= $37,500.

Net gain = Total spread - loss
= $412,500 - $37,500
= $375,000.

Becker Brothers’ overall gain from managing the issue = $375,000.