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 $420,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price? Round your answers to the nearest dollar. Loss should be indicated by a minus sign.
$4.75 per share?
$?
$6 per share?
$?
$3.5 per share?
$?
Profit/Loss = (Selling Price per Share * Number of Shares) – Out-of-Pocket Expenses – Proceeds to Beedles
Let’s calculate the profit or loss at the specified average selling prices:
1. At $4.75 per share:
Profit/Loss = ($4.75 * 3,000,000) – $420,000 – $14,000,000
Profit/Loss = $14,250,000 – $420,000 – $14,000,000
Profit/Loss = $14,250,000 – $14,420,000
Profit/Loss = -$170,000
So, at an average selling price of $4.75 per share, Security Brokers would incur a loss of $170,000.
2. At $6 per share:
Profit/Loss = ($6 * 3,000,000) – $420,000 – $14,000,000
Profit/Loss = $18,000,000 – $420,000 – $14,000,000
Profit/Loss = $18,000,000 – $14,420,000
Profit/Loss = $3,580,000
At an average selling price of $6 per share, Security Brokers would make a profit of $3,580,000.
3. At $3.5 per share:
Profit/Loss = ($3.5 * 3,000,000) – $420,000 – $14,000,000
Profit/Loss = $10,500,000 – $420,000 – $14,000,000
Profit/Loss = $10,500,000 – $14,420,000
Profit/Loss = -$3,920,000
So, at an average selling price of $3.5 per share, Security Brokers would incur a loss of -$3,920,000, which can be represented as a loss of $3,920,000.
In summary:
– At $4.75 per share, Security Brokers would incur a loss of $170,000.
– At $6 per share, Security Brokers would make a profit of $3,580,000.
– At $3.5 per share, Security Brokers would incur a loss of $3,920,000.
These calculations show how Security Brokers’ profit or loss varies based on the average selling price of Beedles Inc.’s new stock issue. It’s important for Security Brokers to consider the optimal pricing strategy to maximize their profit or minimize their loss.
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