Denton Company plans to engage in an IPO and will issue 4 million shares of stock. It is hoping to sell the shares for an offer price of $14. It hires a securities firm, which suggests that the offer price for the stock should be $12 per share to ensure that all the shares can easily be sold. Explain the dilemma for Denton Company. What is the advantage of following the securities firm's advice? What is the disadvantage? Is the securities firm's incentive to place the shares aligned with that of Denton Company

Denton company plans to raise money via IPO which means Initial Public Offerings of 4 million shares at an offer price of $14 per share, at this price company can raise $56 million ($14 million * 4 ). However, the security firms advice to company that the price of $14 per share is too high and may results in under-subscribe of an IPO and fixes an issue price of $12 per share, at which price all the share should be placed.

If Denton company agrees to the price of $12 per share the company can raise $48 million ($12 * 4 million) which is $8 million below the anticipated IPO amount. The dilemma faced by Denton company is whether it should take a risk of issue remaining under-subscribe at the high offer IPO price or sacrifice $8 million to ensure that all the shares will be easily sold at $12 per share

The advantage of following the security firm advice is that Danton company can reduce it's risk of under-subscribing of an IPO and can attract more and more investors with its attractive valuation which can increase a demand of stock in the market and the IPO can also list with a premium on the listing day.

The big disadvantage is that the company will lose its $8 million if it follows the advice of security firm and the company.

The securities firms incentive to place the shares does not align with that of Denton company. The securities firm wants to place all of the shares for Denton. However, it does not suffer loss in proceeds when it lower the offer price.