Question

Becker Brothers is the managing underwriter for a 1.45-millon-share issue by Jay’s Hamburger Heaven. Becker Brothers is “handling” 10 percent of the issue. Its price is \(27 per share, and the price to the public is \)28.95.

Becker also provides the market stabilization function. During the issuance, the market for the stock turns soft, and Becker is forced to purchase 50,000 shares in the open market at an average price of \(27.50. It later sells the shares at an average value of \)27.20.

Compute Becker Brother’s overall gain or loss from managing the issue.

Short answer

The net gain earned by Becker Brothers is $267,750

Step-by-step solution

Computation of amount of spread

$$\begin{gathered} Spread=\left(Publicprice-Nettocorporation\right)\times Numberofshares \\ =\left(\$28.95-\$27\right)\times \left(10\%\times 1.45million\right) \\ =\$1.95\times 145,000 \\ =\$282,750 \end{gathered}$$

Computation of loss on forced purchase

$$\begin{gathered} Loss=Numberofshares\times \left(Purchaseprice-Sellingprice\right) \\ =50,000\times \left(\$27.50-\$27.20\right) \\ =50,000\times \$0.30 \\ =\$15,000 \end{gathered}$$

Computation of overall gain or loss

$$\begin{gathered} Overallgain=Amountofspread-lossonforcedpurhase \\ =\$282,750-\$15,000 \\ =\$267,650 \end{gathered}$$

Hence, the net gain from managing the issue is $267,750