QUESTION 4: AL Rajhi investment banking firm has proposed two types of payment plans for the IPO being considered by TREASURY TEAM of ARAMC0, a manufacturer of oil drilling. The first is a firm commitment of \( \$ 10,000,000 \). The second is a best effort in which AL Rajhi will receive \( \$ 3.00 \) for every share sold up to a maximum of \( \$ 1,200,00 \) for the 400,000 shares being offered. How much money will Al Rajhi 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? (3Marks)

If Al Rajhi sells 90% of the 400,000 shares, they will sell 360,000 shares. At a price of \$30.00 per share, the total revenue from the sale will be \( 360,000 \times 30 = \$10,800,000 \). Under the firm commitment method, Al Rajhi earns the fixed amount of \$10,000,000 regardless of the number of shares sold, provided they are able to sell all the issued shares. Therefore, Al Rajhi's earnings from the firm commitment method remain at \$10,000,000. Now, it’s important to note that the firm commitment method provides a more predictable income stream compared to the best effort method, which can be less stable due to its dependency on sales performance. This can be particularly crucial for both the underwriter and the issuer in planning future financial strategies.