LaJolla Securities, Inc. specializes in the underwriting of small companies The terms of a recent offering were as follows:
Number of shares 2 million
Offering price $25 per share
Net proceeds $45 million
LaJolla Securities expenses, associated withthe offering, were $500,000. Determine LaJolla Securities
profit on the offering if, immediately after the offering began, the secondary market price of each share was as follows:
A. $23 per share
B. $25 per share
C $28 per share
To determine LaJolla Securities' profit on the offering, we need to calculate the total revenue and total expenses associated with the offering.
1. Total Revenue:
The total revenue is calculated by multiplying the number of shares by the offering price.
Total Revenue = Number of shares × Offering price
Given that the number of shares is 2 million and the offering price is $25 per share:
Total Revenue = 2,000,000 × $25 = $50,000,000
2. Total Expenses:
The total expenses are the sum of the expenses associated with the offering and the net proceeds.
Total Expenses = Expenses associated with the offering + Net proceeds
Given that the expenses associated with the offering are $500,000 and the net proceeds are $45 million:
Total Expenses = $500,000 + $45,000,000 = $45,500,000
3. Profit/Loss:
The profit on the offering is the difference between the total revenue and total expenses.
Profit = Total Revenue - Total Expenses
Now, let's calculate the profit under the different scenarios:
A. Secondary market price of $23 per share:
Total Revenue = 2,000,000 × $23 = $46,000,000
Profit = $46,000,000 - $45,500,000 = $500,000
B. Secondary market price of $25 per share:
Total Revenue (same as in the offering) = $50,000,000
Profit = $50,000,000 - $45,500,000 = $4,500,000
C. Secondary market price of $28 per share:
Total Revenue = 2,000,000 × $28 = $56,000,000
Profit = $56,000,000 - $45,500,000 = $10,500,000
Therefore, the profit on the offering would be:
A. $500,000 if the secondary market price is $23 per share.
B. $4,500,000 if the secondary market price is $25 per share.
C. $10,500,000 if the secondary market price is $28 per share.