Question

Problem 18-01
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 $450,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price?

1. $5.5 per share? Use minus sign to enter loss, if any.
   $
   
2. $6.25 per share? Use minus sign to enter loss, if any.
   $
   
3. $3.75 per share? Use minus sign to enter loss, if any.
   $

Answer 1

Profit/Loss of Security Broker = (Price * Number of shares) - Proceeds to Beedles - Expenses incurred by Security Broker

a. Profit/Loss of Security Broker = ($5.5 * 3,000,000) - $14,000,000 - $450,000 = $2,050,000

b. Profit/Loss of Security Broker = ($6.25 * 3,000,000) - $14,000,000 - $450,000 = $4,300,000

c. Profit/Loss of Security Broker = ($3.75 * 3,000,000) - $14,000,000 - $450,000 = -$3,200,000