Bluesky.com, which currently is a privately held corporation, is making plans for future growth. The company’s financial manager has recommended that Bluesky “go public” by issuing common stock to raise the funds needed to support the growth. The current owners, who are the founders of the company, are concerned that control of the firm will be diluted by this strategy. If Bluesky undertakes an IPO, it is estimated that each share of stock will sell for $5, the investment banking fee will be 15 percent of the total value of the issue, and the costs to the company for items such as lawyer fees, printing stock certificates, SEC registration, and so on will be approximately 1 percent of the total value of the issue.
a. If the market value of the stock issue is $42 million, how much will Bluesky be able to use for growth?
b. How many shares of stock will Bluesky have to issue if it needs to net $42 million for growth?
c. The founders now hold all of the company’s stock—10 million shares. If the company issues the number of shares computed in part (b), what proportion of the stock will the founders own after the IPO?
d. If the founders must issue stock to finance the growth of the firm, what would you recommend they do to protect their controlling interest for at least a few years after the IPO?