Canby Corporation entered into an agreement with its investment banker to sell 10 million shares of the company's stock with Canby netting $225 million from the offering. The expected price to the public was $24 per share.
The out-of-pocket expenses incurred by the investment banker were $4 million. Canby incurred expenses of $2.5 million.
a. What profit or loss would the investment banker incur if the issue were sold to the public at an average price of $24 per share?
b. What profit or loss would the investment banker realize if the issue were sold to the public at an average price of $22 per share?
c. Is the agreement between Canby and its investment banker an example of a negotiated or a best-efforts deal? Why? Which is riskier to Canby? Why?