Question: (Instructor Problem: Estimating Cost of Issuance no solutions will be provided) Your firm has 10 million shares outstanding, and you are about to issue 5

(Instructor Problem: Estimating Cost of Issuance no solutions will be provided) Your firm has 10 million shares outstanding, and you are about to issue 5 million new shares in an IPO. The IPO price has been set at $20 per share, and the underwriting spread is 7%. The IPO is a big success with investors, and the share price rises to $50 on the first day of trading.

a. How much did your firm raise from the IPO?

b. What is the market value of the firm after the IPO?

c. Assume that the post-IPO value of your firm is its fair market value. Suppose your firm could have issued shares directly to investors at their fair market value, i.e., with no underwriting spread and no underpricing. What would the IPO share price have been in this case, if the firm raises the same amount as in part (a)?

d. Based on the analysis in previous parts, what is the total IPO cost to the firms original investors? e. Who lost from underpricing? Who benefited? Explain.

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