Question

You are negotiating with your underwriters in a firm commitment offering of 11 million primary shares. You have two​ options: set the IPO price at ​$21.00 per share with a spread of 6​%, or set the price at ​$20.30 per share with a spread of 3 %. Which option raises more money for your​ firm? The net price to the firm of the first option is ​$ nothing

Answer 1

Option 1

Price = $21 per share

Spread = 6%

Price to firm = (IPO price * Number of shares committed * (1 - Spread))/Number of shares committed

Price to firm = (21 * 11,000,000 * (1 - 0.06))/11,000,000

Net price to firm = $19.74

Option 2

Price = $20.30 per share

Spread = 3%

Price to firm = (IPO price * Number of shares committed * (1 - Spread))/Number of shares committed

Price to firm = (20.30 * 11,000,000 * (1 - 0.03))/11,000,000

Net price to firm = $19.691.

The first option raises more money (19.74 > 19.69).

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