An investment banker enters into a best efforts arrangement to try and sell 8 million shares of stock at $20 per share for Kemp Corporation. The investment banker incurs expenses of $2.5 million in floating the issue while the company incurs expenses of $1 million. The investment banker will receive 7 percent of the proceeds of the offering.
a. If the offering is successful and sells out at the expected price of $20, how much money will the company receive?
b. If the offering is successful and sells out at the expected price of $20, how much money will the investment banker receive?
c. If the offering is partially successful and 6 million shares are sold at a price of $15, how much does the company receive?
d. Same facts as part c. How much does the investment banker receive?
e. Who bears more risk with a best efforts deal, the company or the investment banker? Why?