Question

ABC Ltd issues a $18 million IPO providing proceeds to ABC of $2.7 per share, from an offer price to the public of $3 per share. The company's legal fees, ASIC registration fees, and other administrative costs are $471,000. The company's share price increases 15 per cent on the first day. What is the underpricing cost to the company of issuing the securities? (in millions of dollars to the nearest three decimal places; don’t use the $ sign eg 7.897)?

Answer 1

Sol:

Number of shares issued = 18 million

Offer price per share = $3

Proceeds per share = $2.7

Share closing price on first day = 3 x (1+15%) = 3 x 1.15 = S3.45

Underpricing cost = Number of shares issued x (Share closing price on first day - Offer price per share)

Underpricing cost = 18 million x ($3.45 - $3)

Underpricing cost = 18 million x 0.45

Underpricing cost  = 8,100,000 or 8.100 million

Therefore underpricing cost to the company of issuing the securities will be 8.100 million.