Question

A firm is making an initial public offering. the investment bankers agree to a firm underwriting commitment of 500,000 shares priced to the public at $50 a share. the underwriter’s spread is 12%. in addition, the underwriter charges $600,000 in legal fees. on the first day of trading, the firm’s stock closed at $61. what were the total costs of the issue?

Answer 1

The total costs of the IPO were $3,600,000, which includes an underwriter's spread of $3,000,000 and legal fees of $600,000.

Step-by-step explanation:

The total costs of the initial public offering (IPO) for a firm that agreed to a firm underwriting commitment of 500,000 shares at $50 per share, with an underwriter's spread of 12% and legal fees of $600,000, would be calculated as follows:

Underwriter's Spread: $50 (share price) x 500,000 (shares) x 12% = $3,000,000

Legal Fees: $600,000

Total Costs: $3,000,000 + $600,000 = $3,600,000

Therefore, the total costs of the issue were $3,600,000. It's important to note that after the IPO, the firm's stock closed at $61 per share, but this closing price does not affect the calculation of the total costs of the IPO.