When an incorporated firm "goes public," it issues new equity that is priced and underwritten by a financial intermediary and sold on a stock exchange in an initial public offering $($IPO$).$ What is the relationship between underwriting and the financial intermediary's profit?

Question $11$Answer

a$.$

The intermediary creates new shares of the security under contract with the firm, generating revenue by leveraging the information asymmetry with other investors.$$

b$.$

The intermediary makes a loan to the firm, which the firm repays with interest if its stock sells for a higher price than anticipated before the IPO.$$

c$.$

The intermediary provides startup capital for the firm in return for stock ownership, which it then$$ trades at a profit during and after the IPO.$$

d$.$

The intermediary guarantees a price to the firm and hopes to sell the equity at an even higher price.