Final answer:
Jennifer's post-IPO ownership will be 20% and her holdings worth $4,000,000. To raise the same IPO proceeds at $62 per share, the company would need to issue approximately 40,323 shares. Jennifer's wealth after this adjustment would be $7,100,000, and the cost of underpricing to her is $1,500,000.
Step-by-step explanation:
To solve the mathematical aspects of Fishwick Enterprises's IPO situation we'll go through each question one by one.
a. Jennifer's Ownership Percentage After the Issue
Currently, there are 200,000 shares and Jennifer owns 100,000 shares. After issuing 50,000 new shares and Jennifer selling 50,000 of her own, the total number of outstanding shares will be 250,000 (200,000 + 50,000). Jennifer will own 50,000 out of 250,000 shares, which is 20% of the company.
b. Jennifer's Holding Worth at End of Day
At the end of the day, the share price is $80. Therefore, Jennifer's 50,000 shares would be worth $4,000,000 (50,000 shares x $80 per share).
c. Shares Needed to Raise Same Proceeds at $62
To raise the same amount of cash, which is $2,500,000 (50,000 shares x $50), at a price of $62 per share, the company would have to issue approximately 40,323 shares (calculated as $2,500,000 / $62 per share).
d. Jennifer's Wealth After $62 Issue Price
If we assume Jennifer still sells 50,000 shares at $62, her cash proceeds would be $3,100,000 (50,000 shares x $62). Her remaining shares would still be worth $4,000,000 (50,000 shares x $80 per share). Therefore, her total wealth would be $7,100,000 (cash + value of remaining shares).
e. Cost of Underpricing to Jennifer
The cost of underpricing is the difference between what was raised and what could have been raised if the shares had been priced at the first day's closing price. The 50,000 shares she sold were underpriced by $30 each ($80 - $50). The total cost of underpricing to Jennifer is $1,500,000 (50,000 shares x $30).