Chapter 5: Q9BP (page 496)

Walton and Company is the managing investment banker for a major new underwriting. The price of the stock to the investment banker is $23 per share. Other syndicate members may buy the stock for $24.25. The price to the selected dealers group is $24.80, with a price to brokers of $25.20. Finally, the price to the public is $29.50.
If Walton and Company sells its shares to the dealer group, what will the percentage return be?
If Walton and Company performs the dealer’s function also and sells to brokers, what will the percentage return be?
If Walton and Company fully integrates its operation and sells directly to the public, what will its percentage return be?

Short Answer

Expert verified

Percentage return is 7.83%
If stocks are sold to brokers, the percentage return will be 9.57%.
If stocks are directly sold to the public, the percentage return would be 28.26%.

Step by step solution

Computation of percentage return

$Percentage return = \frac{Dealer group's price - Investm ent banker's price}{Investm ent banker's price} \times 100 = \frac{$ 24.80 - $ 23}{$ 23} \times 100 = \frac{S 1.80}{S 23} \times 100 = 7.83 %$

If Walton and Company sold stock to the dealer group, its percentage return would be 7.83%.

Computation of percentage return if dealer and broker function is performed

$Percentage return = \frac{Broker'sprice - Investm ent banker's price}{Investm ent banker's price} \times 100 = \frac{$ 25.20 - $ 23}{$ 23} \times 100 = \frac{$ 2.20}{$ 23} \times 100 = 9.57 %$

If Walton and Company sold stock to brokers, its percentage return would be 9.57%.

Computation of percentage return if the company directly sells to the public

$Percen tage return = \frac{Public price - Investment banker's price}{Investm ent banker's price} \times 100 = \frac{$ 29.50 - $ 23}{$ 23} \times 100 = \frac{$ 6.50}{$ 23} \times 100 = 28.26$

If Walton and Company sold stock directly to the public, its percentage return would be 28.26%.

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Assets
	Book value	Liquidation value
Accounts receivables	\(1,400,000	\)1,200,000
Inventory	\(1,800,000	\)900,000
Machinery and equipment	\(1,100,000	\)600,000
Building and plant	\(4,200,000	\)2,500,000
Total assets	\(8,500,000	\)5,200,000

Liabilities and stockholder’s claims
Liabilities
Accounts payable	\(2,800,000
First lien, secured by machinery and equipment	\)900,000
Senior unsecured debt	\(2,200,000
Subordinated debenture	\)1,700,000
Total liabilities	\(7,600,000
Stockholder’s claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder’s claims	\)900,000
Total liabilities and stockholder’s claims	$8,500,000

Short Answer

Step by step solution

Computation of percentage return

Computation of percentage return if dealer and broker function is performed

Computation of percentage return if the company directly sells to the public

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