Question

An investment bank offers underwrites an IPO of up to 18.5m shares for ABC Company at...

An investment bank offers underwrites an IPO of up to 18.5m shares for ABC Company at a price of $12.50 per share. Show the $ return to the investment bank under both scenarios: 1. The 18.5m shares sell at $13.25 per share. 2. What happens if the IPO price is overstated and the shares sell for $12.25 per share?

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Homework Answers

Answer #1

Underwriting value = $12.5 x 18.5 million = $231.25 million

Return to the investment bank = Sale proceeds from IPO - Underwriting value

(1)

Sale proceeds from IPO = $13.24 x 18.5 million = $244.94 million

Return to the investment bank = $(244.94 - 231.25) million = $13.69 million

(2)

Sale proceeds from IPO = $12.25 x 18.5 million = $226.625 million

Return to the investment bank = $(226.625 - 231.25) million = - $4.625 million

In this case the investment bank incurs a loss.

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