Question

Barnegat Light sold 200,000 shares in an initial public offering. The underwriter's explicit fees were $90,000. The offering price for the shares was $35, but immediately upon issue, the share price jumped to $43. What is the best estimate of the total cost to Barnegat Light of the equity issue?

A. $90,000
B. $1,290,000
C. $2,390,000
D.$1,690,000

Answer 1

$1,690,000.00

Step-by-step explanation:

Underwriting fees refer to the amount charged by investment banks for assuming the underwriting risks. Underwriting involves the valuation and purchase of the shares of an IPO and reselling them in the markets.

The issuing entity pays the underwriting fee; therefore, it is a cost to them.

For Barnegat light, the cost of the IPO will include, the underwriting fee plus the missed advantage of a higher price.

Underwriting fee: $90,000

Opportunity cost : = 200, 000x(43-35)

=200,000X$8

=1, 600,000

Total cost = $90,000 + 1,600,000

= $1,690,000.00