New York Investments (NYI), an investment banking firm, has proposed two types of payment plans for the IPO being considered by Albany Exploration
The first is a firm commitment of $40,000,000. The second is a best efforts arrangement in which NYI will receive $2.00 for every share sold up to a maximum of $3,600,000 for the 1,800,000 shares being offered. How much money will NYI earn under the firm commitment method if it is able to sell only 95% of the offering at a price of $25.00 per share?
A) $800,000
B) $1,080,000
C) $2,200,000
D) $2,750,000
Answer: D
Explanation: D) Firm commitment compensation = Total dollars raised - firm commitment
= 1,800,000 × $25 × 0.95 - $40,000,000 = $2,750,000.
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