Question

ricing 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 $64 million. Zang currently has 3 million shares outstanding and will issue 1.8 million new shares. ESM charges an 8% 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

Solution:-

Value of equity = $64 million

Number of shares outstanding = 3 million

Value of share= value of equity/ number of shares outstanding

Value of share = $64 million/ 3 million = $21.33

New shares = 1.8 million

Correctly valued offer price= $21.33*1.8 million= $38.4 million

Spread =8%

Cash raise net of spread = value offer price/ ( 1+ rate of spread)

Cash raise net of spread = $38.4 million /(1+0.08)= $35.55555 million rounded to $35.556 million