Question

Pricing Stock Issues in an IPO

Zang Industries has hired the investment banking firm of Eric, Schwartz, & Mann (ESM) to help it go public. Zang and ESM agree that Zang's current value of equity is $61 million. Zang currently has 5 million shares outstanding and will issue 1.9 million new shares. ESM charges a 5% spread.

What is the correctly valued offer price? Do not round intermediate calculations. Round your answer to the nearest cent.

$  

How much cash will Zang raise net of the spread? Enter your answer in millions. For example, an answer of $1.234 million should be entered as 1.234, not 1,234,000. Do not round intermediate calculations. Round your answer to three decimal places.

$   million

Answer 1

Correctly valued offer price:

As per Zang and ESM current value of equity is $61 million.

Outstanding shares of Zang = 5 million

So offer price will be = Current value of equity / outstanding shares

= $61 million / 5 million

= $ 12.2 per share

Cash Zeng will raise:

Zang will issue 1.9 million of shares @ $ 12.2 per share

So total issue price will be = 1.9 million * $ 12.2 per share = $ 23.18 million

As Zeng will receive 95% of the proceeds as spread of 5% have to be given to ESM.

Cash Zeng will raise will be = $ 23.18 million * 95% = $ 22.021 million