Question
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 on 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)? d. Comparing part (b) and part (c), what is the total cost to the firm’s original investors due to market imperfections from the IPO
Answer
{'a': '$100 million', 'b': '$750 million', 'c': '$34', 'd': '$16 per share'}
- Q: How much did the firm raise from the IPO? A: The firm raised $100 million from the IPO.
- Q: What is the market value of the firm after the IPO? A: The market value of the firm after the IPO is $750 million.
- Q: What would the share price have been if the firm issued shares directly to investors at a fair market value? A: The fair market value of the firm post-IPO would be $750 million + $100 million = $850 million. So the share price would have been $850 million / (10 million + 5 million) = $34.
- Q: What is the total cost to the firm’s original investors due to market imperfections from the IPO? A: The total cost to the firm’s original investors due to market imperfections from the IPO is $16 per share. This is the difference between the fair market value per share of $34 and the actual IPO price per share of $20.