Question

Suppose you are the lead underwriter for a start-up company. The company plans to sell 10 million shares at the price of $46 per share. It also provides you an over-allotment option of 1.5 million additional shares. Recent road show estimates demand to be around 20 million shares at $46. There is lots of uncertainty about how the stock will perform after trading starts. Consider the following decisions. 18. Before the trading starts tomorrow, you need to allocate (sell) a number of shares to the institutional investors now at the IPO price. How many shares will you allocate

Answer 1

Answer: 11.5 million shares

Step-by-step explanation:

The demand for the new shares is 20 million at the IPO price and the company plans to sell 10 million shares only.

Demand therefore exceeds supply so you as the lead underwriter will have to exercise the over-allotment option of 1.5 million additional shares provided to you.

Total shares you allocate will be:

= 10 + 1.5

= 11.5 million shares