Homework Answers
Solution to the First Question
Requirement (a)-The total cost to DRK of the equity issue
The total cost to DRK of the equity issue = The underwriter’s explicit fees + The implicit cost incurred
= $36,000 + [60,000 Shares x ($70.00 per share - $68.00 per share)]
= $36,000 + [60,000 Shares x $2.00 per share]
= $36,000 + $120,000
= $156,000
“Hence, the total cost to DRK of the equity issue will be $156,000”
Requirement (b)-The answer is “NO”. The cost of underwriting is not a source of profit to the underwriters.
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