1.Margoles Publishing recently completed its IPO. The stock was offered at a price of $14 per share. On the first day of trading, the stock closed at $19 per share. What was the initial return on Margoles? Who benefited from this underpricing? Who lost, and why?
2.Chen Brothers, Inc., sold 4 million shares in its IPO, at a price of $18.50 per share. Management negotiated a fee (the underwriting spread) of 7% on this transaction. What was the dollar cost of this fee?
3.Your firm has 10 million shares outstanding, and you are about to issue 5 million new shares in an IPO. The IPO price has been set at $20 per share, and the underwriting spread is 7%. The IPO is a big success with investors, and the share price rises to $50 the first day of trading.
a. How much did your firm raise from the IPO?
b. What is the market value of the firm after the IPO?
c. Assume that the post IPO value of your firm is its fair market value. Suppose your firm could have issued shares directly to investors at their fair market value, in a perfect market with no underwriting spread and no underpricing. What would the share price have been in this case, if you raise the same amount as in part (a)?
d. Comparing part (b) and part (c), what is the total cost to the firm’s original investors due to market imperfections from the IPO?
4.You have an arrangement with your broker to request 1000 shares of all available IPOs. Suppose that 10% of the time, the IPO is “very successful” and appreciates by 100% on the first day, 80% of the time it is “successful” and appreciates by 10%, and 10% of the time it “fails” and falls by 15%.
a. By what amount does the average IPO appreciate the first day; that is, what is the average IPO underpricing?
b. Suppose you expect to receive 50 shares when the IPO is very successful, 200 shares when it is successful, and 1000 shares when it fails. Assume the average IPO price is $15. What is your expected one-day return on your IPO investments?
5.On January 20, Metropolitan, Inc., sold 8 million shares of stock in an SEO. The current market price of Metropolitan at the time was $42.50 per share. Of the 8 million shares sold, 5 million shares were primary shares being sold by the company, and the remaining 3 million shares were being sold by the venture capital investors. Assume the underwriter charges 5% of the gross proceeds as an underwriting fee (which is shared proportionately between primary and secondary shares).
a. How much money did Metropolitan raise?
b. How much money did the venture capitalists receive?
6.What are the advantages to a company of selling stock in an SEO using a cash offer? What are the advantages of a rights offer?
7.MacKenzie Corporation currently has 10 million shares of stock outstanding at a price of $40 per share. The company would like to raise money and has announced a rights issue. Every existing shareholder will be sent one right per share of stock that he or she owns. The company plans to require five rights to purchase one share at a price of $40 per share.
a. Assuming the rights issue is successful, how much money will it raise?
b. What will the share price be after the rights issue? (Assume perfect capital markets.) Suppose instead that the firm changes the plan so that each right gives the holder the right to purchase one share at $8 per share.
c. How much money will the new plan raise?
d. What will the share price be after the rights issue?
e. Which plan is better for the firm’s shareholders? Which is more likely to raise the full amount of capital?