Question

Suppose that in April 2019, Van Dyck Exponents offered 100 shares for sale in an IPO. Half of the shares were sold by the company and the other half by existing shareholders, each of whom sold exactly half of their existing holding. The offering price to the public was $50 and the underwriters received a spread of 7%. The issue was heavily oversubscribed and on the first day of trading the stock price rose to $160.

What was the cost of the underpricing to the selling shareholders?

Answer 1

Offer price	$50
Underwriters spread	7%
End of day price	$160
Formula to calculate selling shareholders costs
Selling shareholders cost = Number of shares issued*(End of day price - net price)
Calculation of selling shareholders costs
Selling shareholders cost = (100*0.50)*(160 - 50*(1-0.07))
Selling shareholders cost = 50*(160 - 46.50)
Selling shareholders cost = 50*113.50
Selling shareholders cost = 5,675
The cost to the selling shareholders would be $5,675