Extreme Adventures Inc. needs to raise capital and has hired Solomon Sisters to be its investment banker (IB)
Solomon recommends a sale of common stock and estimate the firm could raise a gross amount of $7,500,000 if they could sell 300,000 shares of stock at $25 per share. Solomon has offered two compensation methods for its work on the sale of these securities. The first is a best efforts arrangement where Extreme will pay Solomon $1.00 for every share issued. The second is a firm-commitment of $7,000,000. If Solomon is able to sell the entire issue at the recommended price, how much money will it make under each arrangement? What is the break-even point in sales percent between firm commitment and best efforts for Extreme Adventures?
What will be an ideal response?
Answer:
Firm commitment = P × Q - Commitment = $25 × 300,000 - $7,000,000 = $500,000.
Best Effort = Commission per share × Q = $1.00 × 300,000 = $300,000.
Break-even = Firm commitment = Net price per share × q × % sold
= $7,000,000 = $24 × 300,000 × % sold. Solve for % sold = 97.22%.
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