Houston Investments (HI), a Texas-based investment banking firm, has proposed two types of payment plans for the IPO being considered by Anderson Exploration. The first is a firm commitment of $10,000,000
The second is a best efforts arrangement in which Houston Investments will receive $3.00 for every share sold up to a maximum of $1,200,000 for the 400,000 shares being offered. How much money will HI earn under the firm commitment method if it is able to sell only 90% of the offering at a price of $30.00 per share?
A) $800,000
B) $1,080,000
C) $1,200,000
D) $2,000,000
Answer: A
Explanation: A) Firm commitment compensation = Total dollars raised - firm commitment
= 400,000 × $30 × 0.90 - $10,000,000 = $800,000.
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