Question

Your new start-up "goes public" and sells $1 billion of shares. From these proceeds, your investment...

Your new start-up "goes public" and sells $1 billion of shares. From these proceeds, your investment bankers charge a 4% fee. Then, immediately after being issued, your shares rise in value by 15% and stay there. Assume this means your shares would have sold for 15% more if you could have sold them directly to investors. How much more capital would your firm have raised if you could avoid the 4% fee and sold the shares for their theoretically fair price (15% higher than the price you sold for).

Group of answer choices

$190 million

$144 million

$40 million

None of these are within $1 million of correct

$150 million

Homework Answers

Answer #1

If you could have sold the shares directly to investors, you could avoid the 4% fee and your shares would have sold for 15% more.

net proceeds received (after underwriting fee) by using investment bankers = $1 billion * (1 - 4%) = $960 million

If you could have sold the shares directly to investors, net proceeds = $1 billion * (1 + 15%) = $1.15 billion

Extra capital your firm would have raised =  $1.15 billion - $960 million

Extra capital your firm would have raised =  $190 million

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