A Section 20 affiliate agrees to underwrite a debt issue for one of its clients. It has suggested a firm commitment offering for issuing 100,000 shares of stock. The FI quotes a bid-ask spread of $97-$97.50 to its customer on the issue date.
a. What are the total underwriting fees generated if all the issue is sold? If only 60 percent is sold?
b. Instead of taking a chance that only 60 percent of the shares will be sold on the issue date, the FI suggests a price of $95 to the issuing firm. The FI quotes a bid-ask rate of $95-$95.40 and sells 100 percent of the issue. From the FI’s perspective, which price is better if it expects to sell the remaining 40 percent at the bid price of $97 under the first quote?