Question

E. Answers B and C only Question 5-6 An investment banker agrees to underwrite an issue of 5 million shares of stock for Rochester Industries S10.50 per share, and it charges Rochester Industries $0.225 per share sold 5. How much money does Rochester Industries receive? on a best-efforts basis. The investment banker is able to sell 4 million shares for A. $41,100,000 B. $54,000,000 C $76,200,000 E. $110,000,000 6. What is the profit to the investment banker if it is able to sell 4 million shares for $10.50 per share? A. Profit of $900,000 B. Loss of $900,000 C. Profit of $7,000,000 D. Loss of $7,000,000 E. Profit of $1,800,000 7. Which of the following is mot true about private placement? A. the underwriting function cannot be avoided. B. the sale of securities directly to the ultimate investor and not through a public offering. C. a fee is earned for the origination/selling or uniting the supplier and user of funds. D. a private placement may reduce the total flotation costs for a business. E. it is used by both lesser-known firms and large, well-known firms in need of funds. 8. The BIS definition: "the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events," encompasses which of the following risks? A. Credit risk and liquidity risk B. Operational risk and technology risk C. Credit risk and market risk D. Technology risk and liquidity risk E. Sovereign risk and credit risk 9. A small local bank failed because a housing market collapse following the departure of the area's largest employer. What type of risk applies to the failure of the institution? A. firm-specific risk B. technological risk C. operational risk D. sovereign risk E. insolvency risk 10. An FI that finances long-term fixed rate mortgages with short-term deposits is exposed to

Answer 1

5. A

Number of shares sold = 4 million

Price per share sold = $10.50

Underwriting fees per share = $0.225

Net amount received by Rochester = 4 million * ($10.50 -$0.225)

= $41.1 million

6. A

Since the underwriting was done on a best effort basis, the underwriter is not responsible for the unsold stock.

Profit of underwriter = Underwriting fees per share * No of Shares

= 4 million * $0.225

= $9,00,000