Question

A privately held company has an estimated value of equity equal to $100 million. The founders...

A privately held company has an estimated value of equity equal to $100 million. The founders own 10 million shares. If the company goes public and sells 1 million shares with no underwriting costs, how much should the per share offer price be? If instead the underwriting spread is 7%, what should the offer price be?

A company is planning an IPO. Its underwriters have said the stock will sell at $50 per share. The underwriters will charge a 7% spread. How many shares must the company sell to net $93 million, ignoring any other expenses?

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Homework Answers

Answer #1

(1)

Given equity = $100 million

Number of shares = $10 million

1 million shares sold with no underwriting costs

So, offer price = Equity/ Number of shares = 100 million/ 10 million = $10

If underwriter spread = 7%

offer price = offer price without underwriting costs - spread percentage = 10 - 7% = 10 - 0.07 = $9.93

Therefore

Offer price with no underwriting costs = $10

Offer price with 7% underwriting spread= $9.93

(2)

Given selling price of stock = $50

Underwriter spread = 7%

Net proceeds= $93 million

Net price = 50 *(1- 0.07) = $46.5

Number of shares = net proceeds/ net price = $93 million/ $46.5 = 2 million

Therefore

Number of shares to be sold = 2 million

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