Answer :
Answer: a)$460,000
b) No.
Explanation:
a) The total cost of equity issues includes explicit fees and implicit fees.
To calculate the explicit fees and implicit price is essentially calculating total cost.
The amount of explicit fees was $60,000. The implicit cost per share is the difference between the increased price (immediate) and offering price.
Calculating the implicit cost per share is then,
= $44 - $40
= $4
Implicit cost per share is $4.
To get the total implicit cost we will multiple by the no of shares.
= $4 x $100,000
= $400,000
The total cost will then be
= Equity fees + Total Implicit cost
= $60,000 + $400,000
= $460,000
b) No. Total cost of underwriting is not a profit to Underwriters as it does not included the cost of Underpricing.
If Underpricing was not included, Underwriters would charge considerably more for explicit fees.
Answer:
A. $460,000
B. No
Explanation:
A.
The share price jumped to $44 -The offering price for the shares of $40 = $4
Share $100,00×4 =$400,000
$400,000+$60,000 =$460,000
Therefore in addition to the explicit fees of $60,000, we are to take into account the implicit cost incurred to DRK from the underpricing in the IPO. The underpricing is $4 per share which means a total of $460,000.
b. No.
Because the underwriters did not capture part of the costs which correspond to the underpricing due to the fact that the underpricing may be a rational marketing strategy in order to attract and keep long-term relationships with their investors because without it the underwriters would need to spend more resources or money in order to place the issue with the public.