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ew Horizons S.A. did its initial public offering (IPO) in 2019. In the offering, the company...

ew Horizons S.A. did its initial public offering (IPO) in 2019. In the offering, the company sold 3.5 million shares with the help of an underwriter bank. The underwriter bank bought the shares from the company for 20 euro, and then sold them to the market for 23 euro per share. A few hours into trading, the share price rose to 35 euros per share. Determine the underpricing cost of the transaction.

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Answer #1

To calculate the underpricing cost of the transaction we use the following formula-

Price at the end of day 1 - offer price/ offer price

=€35 - €23/€23

=0.521739 or 52.1739%

The cost of underpricing is considered to be the difference between the price at which the stock closes on the first day of trading compared with the issue price. We do not consider the price that the company actually gets from the issue but for how much is the share sold to the public.

Do let me know in the comment section in case of any doubt.

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