Phil and Terry Started a New Business Three Years Ago

question 30

Multiple Choice

Phil and Terry started a new business three years ago.Two years ago, they incorporated the business and issued themselves each 20,000 shares of stock.Last year, they took the company public in an IPO and issued an additional 100,000 shares of stock at that time.The offer price was $14 a share, the spread was 8 percent, and the lockup period was six months.The stock closed at $17 a share at the end of the first day of trading.During the first six months of trading, the stock had a price range of $13 to $23 per share.During the second six months of trading, the stock sold between $15 and $21 per share.Both Tracie and Amy purchased 100 shares at the offer price.Given this, which one of the following statements is correct? Ignore trading costs and taxes.

• A)Tracie could have earned a maximum profit of 100($23 - 17) on her investment.
• B)Phil could have sold 5,000 shares at $23 per share.
• C)The underwriters earned a spread per share equal to 8 percent of $17.
• D)The maximum price at which Terry could have sold his shares is $21.
• E)Amy paid 108 percent of $14 per share to purchase her 100 shares.

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Definitions:

Gain on Realization

Profit recognized from selling an asset for more than its book value.

Loss or Gain

The financial result from business transactions, investments or other financial events, indicating a profit (gain) or a deficit (loss).

Realization Account

An account used in the process of dissolving a partnership or corporation, where the assets are converted into cash and liabilities are paid off.

Post-closing Account Balances

The balances of all ledger accounts after adjusting entries have been made and temporary accounts have been closed out at the end of an accounting period.