Answer:
Your firm has 10 million shares outstanding, and you are about to issue 5 million new shares inan IPO. The IPO price has been set at $20 per share, and the underwriting spread is 7%. The IPOis 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?5,000,000 × (20 – 7% × 20) = $93,000,000b)What is the market value of the firm after the IPO?15,000,000 ×50 = $750,000,000c)Assume that the post-IPO value of your firm is its fair market value. Suppose your firmcould have issued shares directly to investors at their fair market values in a perfectmarket with no underwriting spread and no underpricing. What would the share pricehave been in this case, if you raise the same amount as in part a)?$750,000,000 – $93,000,000 = $657,000,000$657,000,000 / (10,000,000 shares) = $65.70 per shared)Comparing part b) and part c), what is the total cost to the firm’s original investors due tomarket imperfections from the IPO?($65.70 – $50.00) × 10,000,000 = $157,000,000