Underwriting of Shares: Questions and Answers

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on November 16, 2021

Underwriting of Shares

Question 1: Partial Underwriting

A company issued 100,000 shares valued at $100 per share. The shares were underwritten as follows:

  • X: 30,000 shares
  • Y: 50,000 shares

The public applied for 70,000 shares.

Required: Determine the liability of X, Y, and the company.

Answer

Marked applications are not given in the problem. Therefore, applications are credited to underwriters, including the company, based on gross liability. The company itself should be treated as an underwriter for 20,000 shares.

Statement Showing Individual Underwriters' Liability
Alternatively, the calculations can be made as follows:

Net Liability For X, Y, and Company

Question 2: Full Underwriting

A company that was incorporated on 1 January 2019 issued a prospectus inviting applications for 500,000 equity shares at $10 each per share. The whole issue was fully underwritten by four individuals, as shown in the following:

  • A: 200,000 shares
  • B: 150,000 shares
  • C: 100,000 shares
  • D: 50,000 shares

Applications were received for 450,000 shares, of which the marked applications were as follows:

  • A: 220,000 shares
  • B: 90,000 shares
  • C: 110,000 shares
  • D: 10,000 shares

Required: Calculate the liabilities of individual underwriters.

Answer

Net Liability of A, B, C, and D
Calculation For Number of Unmarked Applications
Note: When the entire issue is underwritten by a single underwriter, it is not necessary to distinguish between marked and unmarked applications. In this case, the liability for the underwriter would be 50,000 shares.

Question 3: Firm Underwriting

John Limited issued 10,000 shares valued at $100 each. The entire issue was underwritten as follows:

  • A: 50%
  • B: 30%
  • C: 20%

In addition, there was firm underwriting as follows:

  • A: 1,000 shares
  • B: 750 shares
  • C: 500 shares

The total subscription, including firm underwriting, was 8,000 shares. The subscription included the following marked applications:

  • A: 1,500 shares
  • B: 2,000 shares
  • C: 750 shares

Required: Calculate the liability of the underwriters.

Answer

Net Liability For A, B, and C With Firm Underwriting

Question 4

The following underwriting takes place:

  • A: 5,000 shares
  • B: 3,000 shares
  • C: 2,000 shares

In addition, there is firm underwriting:

  • A: 1,000 shares
  • B: 500 shares
  • C: 1,500 shares

The shares issued amount to 10,000 shares. The total subscription, including firm underwriting, was 8,500 shares, and the forms included the following marked forms:

  • A: 2,000 shares
  • B: 1,000 shares
  • C: 1,000 shares

Required: Calculate the allocation of liability of the underwriters.

Answer

Liability of Each Underwriter

Question 5

A company issued a prospectus inviting applications for 20,000 equity shares valued at $100 per share. The whole issue was fully underwritten by three underwriters as follows:

  • A: 10,000 shares
  • B: 7,000 shares
  • C: 3,000 shares

Applications were received for 16,000 shares, of which marked applications were as follows:

  • A: 7,600 shares
  • B: 4,040 shares
  • C: 3,360 shares

Required: Show how the liability of the underwriting should be completed.

Answer:

Completion of Liability of Underwriting

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

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