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 best efforts method if it is able to sell only 95% of the offering at a price of $25.00 per share?
A) $3,420,000
B) $3,600,000
C) $3,200,000
D) $2,800,000
Answer: A
Explanation: A) Best efforts cash flow = # of shares offered × percent sold × commission per share sold
= 1,800,000 × 0.95 × $2.00 = $3,420,000.
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