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Mint corporation had 8000 shares outstanding before listing and planned to issue 10000 new shares in an IPO
Mint corporation had 8000 shares outstanding before listing and planned to issue 10000 new shares in an IPO. The IPO price has been set at 17 dollars per share, and the underwriting spread is 6%. The IPO was a big success with investors, and the share price increased to 35 dollars by the end of the first day of trading.
(a): By how much is the offer mispriced (either under- or over-priced) per share by the end of the first trading day? Please calculate the dollar amount per share.
(b): Is the offer underpriced or overpriced?
(c): What is the total dollar amount that Mint corporation pays as an underwriting spread?
(d): What is the net amount that Mint corporation raised during the IPO?
Expert Solution
a) The IPO is said to be mis-priced if the listing Price is different from its IPO Price.
Mis-priced by = Closing price on listing day - IPO price
= 35 -17
= $18.00 per share
The issue is mis-priced by $18 per share
b)
Offer is underpriced, since the share price ended up by 18$ higher than the IPO price
c)
Underwriting Spread paid = Total no. of shares Issued * IPO Price* Underwriting Spread
= 10000 * 17*6%
= $10,200
Net amount Mint corporation raised = Total No.of shares issued* IPO Price * (1- Underwriting spread)
=10000*17*(1-6%)
= $ 159,800
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