Question

Lingadalli Corporation (LC) is considering an IPO. LC has 12 million shares of common stock owned by its founder and early investors. LC has no preferred stock, debt,or short-term investments. Based on its free cash flow projection, LC ’ s intrinsic value of operations is $210 million. LC wants to raise $30 million (net of flotation costs) in net proceeds. The investment bank charges a 7% underwriting spread. All other costs associated with the IPO are small enough to be neglected in this analysis and all shares sold in the IPO will be newly issued shares. Answer the following questions.

'a. What is the intrinsic stock price per share before the IPO?

'b. Given the target net proceeds, what amount of gross proceeds are required?

'c. What is projected total value of LC immediately after the IPO? Based on the total amount paid by the shareholders purchasing new shares in the IPO, what percentage of the total post-IPO value do you think the new shareholders require to justify their stock purchases?

'd. How many new shares must be sold in the IPO to provide the percentage of ownership required by the new shareholders? How many total shares will be outstanding after the IPO?

'e. Based on number of new shares sold in the IPO and the total amount paid by the new shareholders, what is the offer price? '

f. Based on total value of the company after the IPO and the total number of outstanding shares after the IPO, what is the intrinsic price per share after the IPO?

'g. Compare the pre-IPO price, the offer price, and the post-IPO price. Explain why they are similar of different. (No calculations are required.)

Answer 1

A. Intrinsic value of share before IPO = $210 Million / $12 Million

= $ 17.50

The value of per shares before raising IPO = $ 17.50

. B. Net proceed given in Question = $30 Million

then,

Gross Proceeds = $ 30 Million + $ 30 Million * 7/107

= $31.963 Million

Gross Proceeds are required amounting to Rs. $31.963 Million.

C. The Projected value of LC = $ 210 Million + $ 30 million

= $ 240 Million

The new shareholders require to justify their stock purchases is = ($30 Million / $ 240 million)*100

= 12.5%

D. New shares to be sold in IPO = $31.963 Million/$17.5

= 1.83 million

Total Share are outstanding after IPO = 1.83 MIllion + 12 Million

= 13.83 Million.