Underwriting of Shares: Questions and Answers
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.
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.
Alternatively, the calculations can be made as follows:
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.
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.
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.
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.
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.