Question

1. A company prices its IPO of 120 million shares through an underwritten offering at a price to the public of $20 per share. 100 million shares are being sold by the company and 20 million shares are being sold by selling shareholders. The underwriting discount is 5%. The underwriters are granted an over-allotment option covering 15% of the shares sold. The shares immediately trade up to $25 per share in the first day of trading. Answer the following questions:

The price per share to the public is:   

The price per share paid by the underwriters is:

The total proceeds to the company (before option) is:

The total proceeds to the selling shareholders is:

If the shares remain above $25 per share, is it likely that the underwriters will exercise the over-allotment option? (yes or no)

2. Which two types of risks of a new venture should an entrepreneur try to eliminate early in the venture’s life?

1. Deal killer risk
2. High ROI risk
3. Path dependent risk
4. Market risk

1. I and III only
2. I and II only
3. III and IV only
4. II and III only

  

1. A company prices its IPO of 120 million shares through an underwritten offering at a price to the public of $20 per share. 100 million shares are being sold by the company and 20 million shares are being sold by selling shareholders. The underwriting discount is 5%. The underwriters are granted an over-allotment option covering 15% of the shares sold. The shares immediately trade up to $25 per share in the first day of trading. Answer the following questions: The price per share to the public is: The price per share paid by the underwriters is: The total proceeds to the company (before option) is: The total proceeds to the selling shareholders is: If the shares remain above $25 per share, is it likely that the underwriters will exercise the over-allotment option? (yes or no) 2. Which two types of risks of a new venture should an entrepreneur try to eliminate early in the venture's life? I. Deal killer risk II. High ROI risk III. Path dependent risk IV. Market risk A. I and III only B. I and II only C. III and IV only D. II and III only

Answer 1

Since the offer price is $20, price per share to the public is $20 Since the underwriting discount is 5%, price per share paid by the underwriters is $20*(1-5%) = $19 Total proceeds to the company before option are $19*100 million = $1.9 billion Total proceeds to the selling shareholders are $19*20 million = $380 million Yes. If the shares remain above $25 per share, the underwriters are likely to exercise the over-allotment option because doing so will allow them to buy the additional shares from the Company at $19 and issue the same to the public at higher profit • 2. A-I & Ill only. Deal-killer risks are uncertainties that, if not resolved at early stage, could cause the entire venture collapse. Path-dependent risks arise when pursuing the wrong path would involve wasting large sums of money or time or both. If entrepreneur fails to identify these risks at earliest, he could run out of funds even before the product comes to the market. Hence he should try to eliminate both these risks early in the ventures life

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