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Your firm has 11 million shares outstanding, and you are about to issue 4 million new shares in an IPO
Your firm has 11 million shares outstanding, and you are about to issue 4 million new shares in an IPO. The IPO price has been set at $16 per share, and the underwriting spread is 6%. The IPO is a big success with investors, and the share price rises to $48 the first day of trading a. How much did your fimm raise from the IPO? b. What is the market value of the firm after the IPO? c. Assume that the post IPO value of the firm is the 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)? d. Comparing part (b) and part(e), what is the total cost to the firm's original investors due to market imperfections from the IPO?
Expert Solution
Answer : Calculation of the Amount that the firm could have raised from the IPO :
Amount Raised = Number of shares * [Issue Price * (1 - underwriting spread)]
= 4,000,000 * [16 * (1 - 0.06)]
= 60,160,000
(b.) Market Value of Firm = Total Number of shares * Share Price
= (11,000,000 + 4,000,000) * 48
= 720,000,000
(c.) Calculation of share Price = Difference in part (b.) &(a.) / Difference in number of shares in part b and a
= (720,000,000 - 60,160,000) / (15,000,000 - 4,000,000)
= 59.99
(d.) Total cost sue to Market Imperfections = (59.99 - 48) * 11,000,000 = 131,840,000
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