The little company you and your friend started in your parents garage has grown so much that

Question:

The little company you and your friend started in your parents’ garage has grown so much that you are now ready to take the firm public. In your discussions with one of the top investment dealers, you have been given a choice between two alternatives:
Plan I: The investment will underwrite the issue of one million shares at $14 per share. There will be an underwriting fee of 6.5 percent of the gross proceeds.
Plan II: The investment will accept the 1 million shares on a “best efforts” basis. The price will be $15 per share, and it is believed that 95 percent of the shares will be sold. The investment dealer’s fee will be $950,000. What will the net proceeds be under each plan? What will the investment charge under each plan? Which plan should you accept?

Dealer
A dealer in the securities market is an individual or firm who stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price). A dealer seeks to profit from the spread between the...