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Answer the following questions for a fictitious public offering, and show all calculations: a. An investment...

Answer the following questions for a fictitious public offering, and show all calculations: a. An investment bank offers underwriters an IPO of up to 19m shares for ABC Company at a price of $12.75 per share. Show the $ return to the investment bank under both scenarios: i The 19m shares sell at $13.50 per share. ii What happens if the IPO price is overstated and the shares sell for $12.25 per share?

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Answer:

Underwriting value = $12.75 x 19 million = $242.25 million

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

(1)

Sale proceeds from IPO = $13.5 x 19 million = $256.5 million

Return to the investment bank = $(256.5 - 242.25) million = $14.25 million

(2)

Sale proceeds from IPO = $12.25 x 19 million = $232.75 million

Return to the investment bank = $(232.75 - 242.25) million = - $9.5 million

In this case the investment bank incurs a loss.

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