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Unformatted text preview: Bodie, Kane, Marcus, Perrakis and Ryan, Chapter 3 Answers to Selected Problems 1. FBN Inc. has just sold 100,000 shares in an initial public oﬀering. The underwriter’s explicit fees were $70,000. The oﬀering price for the shares was $50, but immediately upon issue the share price jumped to $53. a . What is your best guess as to the total cost to FBN of the equity issue? Answer: FBN not only paid $70,000 but shares seemed to have been underpriced by $3 and thus the overall cost to FBN is $70 , 000 + $3 × 100 , 000 = $370 , 000 . b . Is the entire cost of the underwriting a source of proﬁt to the underwriters? Answer: No. The $3 per share due to underpricing is not a source of proﬁt for the underwriter. 2. Suppose that you sell short 100 shares of Alcan, now selling at $70 per share. a . What is your possible maximum loss? Answer: There is no limit to the maximum possible loss as the price of the underlying asset may rise to inﬁnity. b . What happens to the maximum loss if you simultaneously place a stop-buy order at $78? Answer: Then the maximum possible loss is $8 per share, which means $800. 1 3. D´ ee Trader opens a brokerage account, and purchases 300 shares of Internet Dreams at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8 percent. a . What is the margin in D´ ee’s account when she ﬁrst purchase the stock? Answer: The value of total assets in D´ ee’s account is $40 × 300 = $12 , 000, her total liabilities are $4,000 and thus her equity is $12,000 - $4,000 = $8,000, which is also called the margin. The margin ratio in her account when she purchases the stock is then 8 , 000 12 , 000 = 75% . b . If the price falls to $30 per share by the end of the year, what is the remaining margin in her account? If the maintenance margin requirement is 30 percent, will she receive a margin call? Answer: With a price of $30 per share, the total assets value in D´ ee’s account is $30 × 300 = $9 , 000. The amount of money she owes to her broker is then $4 , 000 × 1 . 08 = $4 , 320, which implies a margin of $9 , 000-$4 , 320 = $4 , 680, and thus a margin ratio of 4 , 680 9 , 000 = 52% ....
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This note was uploaded on 03/01/2012 for the course FINANCE 780 taught by Professor Scott during the Spring '12 term at Missouri State University-Springfield.
- Spring '12