EAST COAST YACHTS GOES PUBLIC Larissa Warren and Dan Ervin have been discussing
ID: 2446004 • Letter: E
Question
EAST COAST YACHTS GOES PUBLIC Larissa Warren and Dan Ervin have been discussing the future of East Coast Yachts. The company has been experiencing fast growth, and the future looks like clear sailing. However, the fast growth means that the company's growth can no longer be funded by internal sources, so Larissa and Dan have decided the time is right to take the company public. To this end, they have entered into discussions with the investment bank of Crowe & Mallard. The company has a working relationship with Renata Harper, the underwriter who assisted with the company's previous bond offering. Crowe & Mallard have helped numerous small companies in the IPO process, so Larissa and Dan feel confident with this choice. Renata begins by telling Larissa and Dan about the process. Although Crowe & Mallard charged an underwriter fee of 4 percent on the bond offering, the underwriter fee is 7 percent on all initial stock offerings of the size of East Coast Yachts' initial offering. Renata tells Larissa and Dan that the company can expect to pay about $1,600,000 in legal fees and expenses, $15,000 in SEC registration fees, and $20,000 in other filing fees. Additionally, to be listed on the NASDAQ, the company must pay $100,000. There are also transfer agent fees of $9,500 and engraving expenses of $540,000. The company should also expect to pay $125,000 for other expenses associated with the IPO. Finally, Renata tells Larissa and Dan that to file with the SEC, the company must provide three years' worth of audited financial statements. She is unsure of the costs of the audit. Dan tells Renata that the company provides audited financial statements as part of its bond indenture, and the company pays $300,000 per year for the outside auditor. 1. At the end of the discussion Dan asks Renata about the Dutch auction IPO process. What are the differences in the expenses to East Coast Yachts if it uses a Dutch auction IPO versus a traditional IPO? Should the company go public with a Dutch auction or use a traditional underwritten offering? 2. During the discussion of the potential IPO and East Coast Yachts' future, Dan states that he feels the company should raise $60 million. However, Larissa points out that if the company needs more cash soon, a secondary offering close to the IPO would be potentially problematic. Instead, she suggests that the company should raise $90 million in the IPO. How can we calculate the optimal size of the IPO? What are the advantages and disadvantages of increasing the size of the IPO to $90 million? 3. After deliberation, Larissa and Dan have decided that the company should use a firm commitment offering with Crowe & Mallard as the lead underwriter. The IPO will be for $70 million. Ignoring underpricing, how much will the IPO cost the company as a percentage of the funds received? 4. Many of the employees of East Coast Yachts have shares of stock in the company because of an existing employee stock purchase plan. To sell the stock, the employees can tender their shares to be sold in the IPO at the offering price, or the employees can retain their stock and sell it in the secondary market after East Coast Yachts goes public (once the 180-day lockup period expires). Larissa asks you to advise the employees about which option is best. What would you suggest to the employees?
Explanation / Answer
Answer:-
Since East Coast Yachts has been experiencing fast growth, and future prospects seems good. So investors in the market would be very interested in the IPO of the company and there will be huge demand for the shares of the company. Due to this huge demand prices will increase and therefore the value of the firm will increase which will benefit employees in the long if they hold the shares with them until IPO happens.
But if I think about a company like Facebook, young and famous, which offered it’s shares to public and attracted intensive attention by investors. But as we know right now, Facebook share price is $108.76 and it’s fluctuating every week. If I was an employee in Facebook, in very first day of the public offering, I try to sell my Facebook shares, because there were no negative comments, criticism or speculations exist in the market and the value of a firm is still high and I can make profit from very beginning of the IPO process.
East Coast Yachts employees can sell their shares at the beginning of the IPO because prices will decrease during those 180 days and they may not get any profit from their arranged investment
If employees sell their shares- number of shares of East Coast Yachts will increase in the market.
With increase in number of shares for East Coast Yachts shares, this will lead to decrease the price of per share . Because if supply increases ,price decreases.
If prices are decrease - the enterprise value of East Coast Yachts will also decrease
A firm with low value will result in decrease demand for the firm’s shares
Low level of demand will result in mismatching between cash outflows and inflows
So this is a frequent financial problem. Employees should take their stocks and wait until company’s shares consumed by investors in the market.
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