Question

please solve question 2, 3, 4, and 5.

2. XYZ, Inc. has issued 2 million new shares of stock. An investment bank agrees to underwrite these shares on a best-efforts basis. The investment bank is able to sell 1.4 million shares for $34 per share, and it charges XYZ $0.75 per share sold. How much money does XYZ receive? What is the profit to the investment bank? What is the stock price of XYZ? 3. What is the adverse selection problem? How does adverse selection affect the profitable management of an insurance company? 4. ABC, Inc. has issued 3.25 million new shares of stock. An investment bank agrees to underwrite these shares on a firm commitment basis. The investment bank pays $12 per share, and it sets the IPO price to $16.75 per share. How much money does ABC receive? What is the profit to the investment bank? What is the stock price of ABC? Which auction structures are most beneficial to sellers (require bidders to bid their reservation price)? Which auction structures are most beneficial to buyers (allow bidders to bid below their reservation price?

Answer 1

Question 2

Underwriting:Underwriting an issue of shares involves entering into a contract with an Underwriter (Individual, Partnership Or Company) undertaking that in the event of shares not being subscribed by the public or only a part of them is being subscribed, he shall take up the balance. Underwriting commission will be paid to the Underwriter for the risk taken.

As per the data given, the company has issued 2 million shares. As the company has entered into Underwriting Agreement, Company will receive the entire amount Less the commission Payable to Underwriters

Particulars	Amount in $
No of Shares	2,000,000
Share Price	34
Total Amount (1)	68,000,000
Commission
No. of Shares	2,000,000
Commission Payable Per Share	0.75
Total Commission (2)	15,00,000
Net Amount Receivable by Company (1)-(2)	66,500,000

It is assumed that Face value of share is $10 and issued at a premium of $24 & the total issue price is $34The Profit to Investment Bank is , it receives the Commission of $ 1,500,000.

Question 3:

Adverse Selection Problem:

Adverse Selection problem is a Situation in which sellers have information that Buyers donot have Or Vice Versa about some aspects of Quality etc.

In Insurance Adverse selection is the tendency of those in dangerous jobs to purchase products like life insurance. In these cases, it is the buyer who actually has more knowledge (e.g., about their health). To fight adverse selection, insurance companies reduce exposure to large claims by limiting coverage or raising premiums.

Because of adverse selection, insurers find that high-risk people are more willing to take out and pay greater premiums for policies. If the company charges an average price but only high-risk consumers buy, the company takes a financial loss by paying out more benefits or claims. Thus in this way, adverse selection problem affect the profitable management of Insurance company.

Question 4:

As the Company has issued 3.25 million Shares, it receives an amount at rate of $12 per Share. The Computation is as Shown below.

Particulars	Amount in $
No of Shares	32,50,000
Share Price	12
Total Amount (1)	3,90,00,000

The Investment bank's Profit is the Difference between the Issue Price ($16.75) and the amount Paid by bank to Company($12). Per Share.

Total income to Investment Company is as shown below.

Particulars	Amount in $
No of Shares	32,50,000
Diff of Issue Price and Amount paid to company per share	4.75
Total Income	1,54,37,500

The Stock Price of ABC is $16.75. per Share.

Question 5

Forward Auction is beneficial to Seller. Backward Auction is beneficial to Buyer.