3. More on the IPO process

The IPO process involves several entities, such as the issuing company, institutional investors, brokers, lawyers, regulators, retail investors, and an intermediary company.

Consider the following IPO deal:

By 1969, Wal-Mart's founder, Sam Walton, had created a chain of Wal-Mart stores. The company's annual sales were around $31 million. To reach this point, the company had taken on a lot of debt. Walton realized that if he wanted the company to grow further, it would need to raise funds and pay off its debt.

Thus, Sam Walton and his son, S. Robson Walton, decided to raise money by selling their stock to the public. In 1970, they raised $4.5 million through an initial public offering. Arkansas-based Stephens Inc. and Boston-based White Weld handled the IPO. As the company grew, the Waltons set up Walton Enterprises, which owns shares of the company.

QUESTION: Identify one of the underwriters in the IPO deal described above.

A. White Weld

B. Walton Enterprises

The underwriter in the IPO process has several responsibilities.

QUESTION: True or False: The underwriter helps determine the preliminary offering price or the price range of the firm's stock.

True

False

Assume that a stock-issuing firm has a choice between a private placement selling the shares for $25.00 per share or a best efforts offering that will sell all available shares at the prices described in the following probability distribution:

Best efforts expected probability distribution

Probability Selling price

Lowest quoted price 35% $20.00

Mid-range price 35% $24.00

Highest quoted price 30% $28.00

QUESTION : Assuming that the issue is fully subscribed, or sold, which method would generate the most capital for the issuing firm?

A.Best efforts sale

B. Private placement