21. IPO Dilemma Denton Company plans to engage in an IPO and will issue 4 millio

Question

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

The dilemma for Denton Company is whether to sell the shares @ $ 14 per share or sell @ $ 12 per share.

If the share is sold @ 14 then, there are chances that not all the shares will be sold.

Advantage of accepting the advice of securities firm is that there will be probability that 100 % shares i.e. all the 4 million shares will be sold.

Disadvantage is that there will be less profit or we can say that the profit will be ecrease by (14-12) = $ 2 per share if the advice of the securities firm is accepted.

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