3.IPOs Why do firms engage in IPOs? What is the amount of the fees that the lead

Question

3.IPOs Why do firms engage in IPOs? What is the amount of the fees that the lead underwriter and its syndicate charge a firm that is going public? Why are there many IPOs in some periods and few IPOs in other periods

21. IPO Dilemma Denton Company plans to engage in an IPO and will issue 4 million shares of stock. It is hoping to sell the shares for an offer price of $14. It hires a securities firm, which suggests that the offer price for the stock should be $12 per share to ensure that all the shares can easily be sold. Explain the dilemma for Denton Company. What is the advantage of following the advice of the securities firm? What is the disadvantage? Is the securities firm’s incentive to place the shares aligned with that of Denton Company

Explanation / Answer

Answer:

Why do firms engage in IPOs?

IPO (Initial Public offer):

Firms engage in IPO to raise the money from public for the very first time.

What is the amount of the fees that the lead underwriter and its syndicate charge a firm that is going public?

lead underwriter and its syndicate charge a predetermined fees from the firm, The fees may be as a % of issue proceeds.

Why are there many IPOs in some periods and few IPOs in other periods ?

Number of IPO may be more in a period when the liquidity in the market is more , in other words investors have more money to invest.   

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