HW #3 (answers)

HW #3 (answers) - 1. What is IPO Underpricing? Underpricing...

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1. What is IPO Underpricing? Underpricing occurs during the IPO process when the issuing firm’s stock price rises much higher in the secondary market than it was priced in the primary market. 2. Explain the issuing firm’s view of IPO underpricing. This is a problem for the issuing firm, as it is “leaving money on the table” by allowing its shares to be priced low. While I didn’t ask it in the HW, be familiar with some possible reasons for why underpricing persists. 4. Phillip's Manufacturing wants to raise $15 million to open a new production center. The company estimates the issue costs including the legal and accounting fees will be $530,000. The underwriters have set the stock price at $23 a share and the underwriting spread at 8.5 percent. How many shares of stock does Phillip's have to sell to meet their cash need? Total value of issue = ($15,000,000 + $530,000) / (1 .085) = $16,972,677.60; Number of shares needed = $16,972,677.60 / $23 = 737,942.50 = 737,943 shares 5. Allied Corporation offers 40,000 shares of common stock to the public in an initial public offering (IPO). The underwriters agree to provide their services in a best efforts underwriting. The offering price is set at $28. The gross spread is $3. After completing
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HW #3 (answers) - 1. What is IPO Underpricing? Underpricing...

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