Lesson #7, Assignment #4

# Lesson #7, Assignment #4 - Chapter 15 S&S Air Goes...

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Unformatted text preview: Chapter 15 S&S Air Goes Public Input area: Underwriter fee Legal fees and expenses SEC registration fees Filing fees NASDAQ listing fee Transfer agent fee Engraving expenses Other expenses Audit cost/year IPO size 7.00% \$1,800,000 \$12,000 \$15,000 \$100,000 \$6,500 \$520,000 \$110,000 \$300,000 \$75,000,000 Question 1: At the end of the discussion, Mark asks Kim about the Dutch auction IPO p differences in the expenses to S&S Air if it uses a Dutch auction IPO versus a traditio company go public through a Dutch auction or use a traditional underwritte The main difference in the costs is the reduced possibility of underpricing in a Dutch auction. In should be better since it should eliminate underpricing. However, as Google shows, underpricing can still exist in a D Whether the underpricing is a severe in a Dutch auction as it would be in a traditiona offer is unknown. Question 2: During the discussion of the potential IPO and S&S Air's future, Mark sta company should raise \$75 million. However, Kim points out that if the company needs future, a secondary offering close to the IPO would be problematic. Instead she sugge should raise \$90 million in the IPO. How can we calculate the optimal size of the IPO? W and disadvantages of increasing the size of the IPO to \$90 million? During the discussion of the potential IPO and S&S Air's future, Mark states that he fee raise \$75 million. However, Kim points out that if the company needs more cash in the n offering close to the IPO would be problematic. Instead she suggests that the company sh the IPO. How can we calculate the optimal size of the IPO? What are the advantages a increasing the size of the IPO to \$90 million? There is no way to calculate the optimum size of the IPO, so whether Mark is corr correct will only be told in time. The disadvantages of raising the extra cash in the IP agency costs of excess cash. The extra cash may encourage management to act care cash will also earn a small return unless invested in income producing assets. At best, c investments are a zero NPV investment. The advantages of the increased IPO siz increased liquidity for the company, and the lower probability that the company will h to the primary market in the near term future. The increased size will also reduce the There is no way to calculate the optimum size of the IPO, so whether Mark is corr correct will only be told in time. The disadvantages of raising the extra cash in the IP agency costs of excess cash. The extra cash may encourage management to act care cash will also earn a small return unless invested in income producing assets. At best, c investments are a zero NPV investment. The advantages of the increased IPO siz increased liquidity for the company, and the lower probability that the company will h to the primary market in the near term future. The increased size will also reduce the on a percentage of funds raised, although this may not be a large advant Question 3: How much will the IPO cost the company as a percentage of the funds received? Underwriter fees Total fees excluding underwriter fees Total fees Net amount raised Fee as a percentage of funds raised \$5,250,000 \$2,563,500 \$7,813,500 \$69,750,000 11.20% Question 4: Many employees of S&S Air have shares of stock in the company because o stock purchase plan. To sell the stock, the employees can tender their shares to be sold price, or the employees can retain their stock and sell it in the secondary market after S& asks you to advise the employees about which option is best. What would you sugge There are advantages and disadvantages to each. If the employee tende the stock to be sold in the IPO, the employee will lose out on any underpricing. Th significant cost. However, if the employee retains the stock, he/she must hold the lockup period, typically 180 days. Additionally, during the lockup period, the emplo prohibited from hedging the price risk of the stock with any derivatives. And heav insiders is considered a negative signal by the market. Another risk in not selling in after the lockup period expires, the employees may be considered insiders, subj restrictions on selling stock. Dutch auction IPO process. What are the PO versus a traditional IPO? Should the ditional underwritten offering? n a Dutch auction. In theory, the Dutch auction ld g can still exist in a Dutch auction. ould be in a traditional underwritten ir's future, Mark states that he feels the he company needs more cash in the near . Instead she suggests that the company l size of the IPO? What are the advantages IPO to \$90 million? k states that he feels the company should more cash in the near future, a secondary that the company should raise \$90 million in re the advantages and disadvantages of million? whether Mark is correct or kim is e extra cash in the IPO include the nagement to act carelessly. The extra ing assets. At best, cash and shortterm he increased IPO size include the at the company will have to go back will also reduce the costs of the IPO company because of an existing employee r shares to be sold in the IPO at the offering ary market after S&S Air goes public. Todd t would you suggest to the employees? If the employee tenders any underpricing. This could be a e/she must hold the stock for the up period, the employee is legally erivatives. And heavy selling by risk in not selling in the IPO is that idered insiders, subject to SEC ...
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