1. Your firm has 10 million shares outstanding, and you are about to issue 5 mil
ID: 2719415 • Letter: 1
Question
1. Your firm has 10 million shares outstanding, and you are about to issue 5 million new shares in an IPO. The IPO price has been set at $20 per share, and the underwriting spread is 7%. The IPO is a big success with investors, and the share price rises to $50 the first day of trading.
a) How much did your firm raise from the IPO?
b) What is the market value of the firm after the IPO?
c) Assume that the post IPO value of your firm is its fair market value. Suppose your firm could have issued shares directly to investors at their fair market value, in a perfect market with no underwriting spread and no underpricing. What would the share price have been in this case, if you raise the same amount as in part (a)? Make any suitable assumptions that you may need to make.
Explanation / Answer
a) =[20-(7%*20))]*5mn=$93 mn
b)no of shares*market share price
=15mn*50= $750mn
c)Market value of the assets less new cash rised= 750-93= $657mn
shareprice= 657/10= $65.7 new share
Money raised in IPO at present share price= 93/65.7=1.4155mn shares
750/(10+1.4155)=$65.7
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