Part of the negotiation with the investment banker during the selection process has to do with how the investment banker will be compensated for taking the company public. One of these two standard compensation packages involves ________
A) a firm-commitment approach, in which the investment banker essentially buys the entire stock issue from the company at several prices
B) a best efforts approach, in which the investment banker pledges to do his or her best to sell the shares and will take a small percentage of the sale of each stock
C) a best efforts approach, in which the investment banker essentially buys the entire stock issue from the company at one price and then sells the issue at the auction for a higher price
D) a firm-commitment approach, in which the investment banker pledges to do his or her best to sell the shares and will take a small percentage of the sale of each stock
Answer: B
Explanation: B) There are two standard compensation packages. The first is a firm-commitment approach. With firm commitment, the investment banker essentially buys the entire stock issue from the company at one price and then sells the issue for a higher price. A second compensation is a best efforts sale by the investment banker. Here, the investment banker pledges to do his or her best to sell the shares and will take a small percentage of the sale of each stock. The firm, however, is not guaranteed a specific amount from the sale–only the proceeds of the sale minus the commission paid to the investment banker on a per-share basis.
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