Question

An investment bank offers underwrites an IPO of up to 18.5m shares for ABC Company at a price of $12.50 per share. Show the $ return to the investment bank under both scenarios:

1. The 18.5m shares sell at $13.25 per share.

2. What happens if the IPO price is overstated and the shares sell for $12.25 per share?

Answer 1

In a bought deal, the investment bank buys the entire shares from the issuing company and then sells it to the public. The spread between the price at which the investment bank bought the shares and the price at which it sells it to the public is the profit or loss to the investment bank.

Scenario 1: The 18.5m shares sell at $13.25 per share.

Profit = (13.25 - 12.50)*18.5 million = $13.875 million

Scenario 2: The shares sell for $12.25 per share

Profit = (12.25 - 12.50)*18.5 million = -$4.625 million

A loss of $4.625 million

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