The Little Company You and Your Friend Started in Your

question 66

Essay

The little company you and your friend started in your parents' garage has grown so much that you are now ready to take the firm public.In your discussions with one of the top investment dealers, you have been given a choice between two alternatives:
Plan I: The investment dealer will underwrite the issue of 1 million shares at $14 per share.There will be an underwriting fee of 7 percent of the gross proceeds.
Plan II: The investment dealer will accept the 1 million shares on a "best efforts" basis.The price will be $15 per share, and it is believed that 95 percent of the shares will be sold.The investment dealer's fee will be $950,000.
What will the net proceeds be under each plan? What will the investment dealer charge under each plan? Which plan should you accept?

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Definitions:

Trial Balance

A bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account columns to ensure accuracy.

Accounts Receivable

Dues from clients to a corporation for goods or services already benefited from but yet to be paid for.

Debit Entries

Accounting records that increase an asset or expense account, or decrease a liability, equity, or revenue account.

Credit Entries

Accounting entries that increase liability or equity accounts or decrease asset or expense accounts.