Question

Walton and Company is the managing investment banker for a major new underwriting. The price of the stock to the investment banker is \(23 per share. Other syndicate members may buy the stock for \)24.25. The price to the selected dealers group is \(24.80, with a price to brokers of \)25.20. Finally, the price to the public is $29.50.

1. If Walton and Company sells its shares to the dealer group, what will the percentage return be?
2. If Walton and Company performs the dealer’s function also and sells to brokers, what will the percentage return be?
3. If Walton and Company fully integrates its operation and sells directly to the public, what will its percentage return be?

Short answer

a. Percentage return is 7.83%

b. If stocks are sold to brokers, the percentage return will be 9.57%.

c. If stocks are directly sold to the public, the percentage return would be 28.26%.

Step-by-step solution

Computation of percentage return

$$\begin{gathered} PercentageReturn=\frac{Dealergroup\text{'}sprice-InvestmentBanker\text{'}sprice}{InvestmentBanker\text{'}sprice}\times 100 \\ =\frac{\$24.80-\$23}{\$23}\times 100 \\ =\frac{\$1.80}{\$23}\times 100 \\ =7.83\% \end{gathered}$$

Computation of percentage return if dealer and broker function is performed

$$\begin{gathered} Percentagereturn=\frac{Broker\text{'}sprice-Investmentbanker\text{'}sprice}{Investmentbanker\text{'}sprice}\times 100 \\ =\frac{\$25.20-\$23}{\$23}\times 100 \\ =\frac{\$2.20}{\$23}\times 100 \\ =9.57\% \end{gathered}$$

If Walton and Company sold stock to brokers, its percentage return would be 9.57%.

Computation of percentage return if the company directly sells to the public

$$\begin{gathered} Percentagereturn=\frac{Publicprice-Investmentbanker\text{'}sprice}{Investmentbanker\text{'}sprice}\times 100 \\ =\frac{\$29.50-\$23}{\$23}\times 100 \\ =\frac{\$6.50}{\$23}\times 100 \\ =28.26\% \end{gathered}$$

If Walton and Company sold stock directly to the public, its percentage return would be28.26%.