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Market Stabilization & Stock Risk: Compute Lynch Brothers' overall gain or loss

Lynch Brothers is the managing underwriter for a 1-million-share issue by Overcharge Healthcare Inc. Lynch Brothers is "handling" 10% of the issue. Its price is $30 per share and the price to the public is $31.50.

Lynch also provides the market stabilization function. During the issuance, the market for the stock turned soft, and Lynch was forced to repurchase 45,000shares in the open market at an average price of $29.90. It later sold the shares at an average value of $26.

Compute Lynch Brothers' overall gain or loss from managing the issue.

Hint: Find original distribution. 10% * 1M = X *1.50 = the profit on original distribution.

Then, calculate the market stabilization. 45000 * 3.90 (29.9-26) = loss on market stabilization. Net the two figures to get the net profit or loss amount.

Solution Preview

In the original underwriting transaction, the value of the transaction was 10% of 1 million that is 100,000 shares that were priced at 30$ and were sold to the public ...

Solution Summary

The solution explains and calculates the net amount for the two transactions by Lynch Brothers for Overcharge Healthcare, Inc. new stock issue.