Chapter 3, Problem 14PS

Summary Introduction

(A)

In this case, 100,000 shares have been sold by DRK Inc. through an initial public offering. The explicit fees charged by the underwriter account for $60,000 and the price at which the shares are offered accounts for $40. The share price jumped to $44 immediately after it is being issued by the company.

To determine:

The total cost of the equity shares to DRK Inc.

Introduction:

Public offering refers to the sale of financial instruments or equity share of an organization to the public so as to raise funds for growth and expansion of the business. Financial instrument here comprises of preferred shares, common shares, equity stakes that can be traded.

Summary Introduction

(B)

To determine:

Whether the total cost associated with the underwriting acts as a souce of profit for the underwriters.

Introduction:

Underwriter refers to the parties that assess and assume the risk of another party in lieu of a fee in the form of interest, spread, premium or commission. Underwriters assume the responsibility of buying the shares from the company issuing it and resell the same. Underwriters can be easily identified in different areas of the financial world viz. common type of debt securities, equity markets, insurance industry, and mortgage industry.