Question

Steel City Motors wants to have an initial public offering. Their investment bank presents two options for the initial issue a fixed commitment offer of $11,600,000, or a best-efforts arrangement where the investment bank receives $2.80 per share offered to the public. Steel City intends to sell 1,000,000 shares at a price of $15. If 80% of the shares are sold at the predetermined price, which arrangement should Steel City choose? Best efforts arrangement because it provides additional proceeds of 2,433,400 Best efforts arrangement because it provides additional proceeds of 52,116,000 Fixed commitment arrangement because it provides additional proceeds of $2,433,400 Best efforts arrangement because it provides additional proceeds of 51.840,000 Fixed-commitment arrangement because it provides additional proceeds of 51,840,000

Answer 1

The correct option is Fixed Commitment arrnagement as it provides additional Proceeds of $1840000.

Money Received in Fixed commitment = 11,600,000

Money Received in Best efforts arrangement = Number of shares subscribed * (Price - Investment bank charge)

= 80% * 1000,000 * ( 15 - 2.80)

= 9760000

Additional Proceed in Fixed commitment = 11,600,000 - 9760000

= 1840000 [ Option E is the correct answer