Question

b) A company makes an initial public offering of shares to raise $220 million, at an offer price of $5.30 per share. The issue is underwritten at $5.00. The costs of preparing the prospectus, legal fees, ASIC registration and other administrative costs add up to $800,000. If the firms’ share price closes at $6.40 on its first day of trade. What is the total cost of the IPO?

Answer 1

Solution:

Size of the IPO = $220 million

Offer price = $5.30

Number of shares that will be issued = 220 /5.30 = 41,509,434 shares

There will be three costs associated with the IPO- Underwriting cost, Underpricing cost and other costs

Underwriting cost per share =$5.30 - $5.00 = $0.30

Total underwriting cost = $0.30 * 41,509,434 = $12,452,830.2

Underpricing cost = $6.40 - 5.30 = 1.10 per share

total underpricing cost = $1.10 * 41,509,434 = $45,660,377.4

Other costs =  $800,000

The total cost of IPO = $12,452,830.2 + $45,660,377.4 + $800,000 = $58,913,207.6