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An investment bank agrees to underwrite an issue of 15 million shares of stock for Looney Landscaping

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An investment bank agrees to underwrite an issue of 15 million shares of stock for Looney Landscaping Corp.

a. If the investment bank underwrites the stock on a firm commitment basis, it agrees to pay $12.50 per share to Looney Landscaping Corp. for the 15 million shares of stock. It can then sell those shares to the public for $13.25 per share.

How much money does Looney receive? What is the profit to the investment bank? If the investment bank can sell the shares for only $11.95, how much money does Looney receive? What is the profit to the investment bank?

b. Suppose, instead, that the investment bank agrees to underwrite the 15 million shares on a best-efforts basis. The investment bank is able to sell 13.6 million shares for $12.50 per share, and it charges Looney Landscaping Corp. $0.275 per share sold. How much money does Looney receive? What is the profit to the investment bank? If the investment bank can sell the shares for only $11.95, how much money does Looney receive? What is the profit to the investment bank?

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