West Coast maunfacturingCompany (WCMC) is executing an initial public offering w

Question

West Coast maunfacturingCompany (WCMC) is executing an initial public offering with thefollowing characteristics. The company will sell 10 million sharesat an offering price of $25 per share, the underwriting will charge7% underwriting fee, & the shares are expected to sell for $32per share by the end of the first day trading.

a. calculate initialreturn earned by investors who are allocated shares in the IPO.
b. How much will WCMC receive from this offering?
c. What is the total cost (underwriting fee & underpricing) ofthis issue to WCMC?

Explanation / Answer

a. Initial return by investors = Mkt price - Issue price = 32-25 =$7 per share b. Issue price = 10 Million shares * $25 per share = $250M Underwriting fee = 7%*250 = $17.5M Net Realization by WCMC = 250-17.5 = $232.5M c. Total Cost of issue to WCMC = $17.5M

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