Question

ABC Ltd., a technology company, issues a $24 million IPO providing proceeds to ABC of $3.6 per share, from an offer price to the public of $4 per share. The company's legal fees, ASIC registration fees, and other administrative costs are $456,000. The company's share price increases 14 per cent on the first day. What is the total cost to the issuer of the IPO (in millions of dollars to the nearest three decimal places; don’t use the $ sign eg 7.897)?

Answer 1

Total cost to the issuer of the IPO = underwriting cost + underprcing cost + other cost,legal and admistrative cost.

No. of shares issued = issues amount / offer price = $ 24 milliin / 4 per share = 6 million shares

Underwriting cost = shares issued * ( offer price - proceed per share)

= 6 million shares * ( 4 - 3.6)

Underwriting cost = $ 2.4 million

Underpricing cost = shares issued * ( ending price of first day - offer price)

Ending price of first day = 4 + 4 * 14% =$ 4.56 per share.

Underpricing cost = 6 million shares * ( 4.56 - 4) = $ 3.36 million.

Total cost to the issuer of the IPO = underwriting cost + underprcing cost + other cost,legal and admistrative cost.

= $ 2.4 million + 3.36 million + 0.456 million

Total cost to the issuer of the IPO = $ 6.216 million