question archive Ocean Gas is a private firm with no debt and has 12 million shares outstanding, and it is about to issue 4 million new shares in an IPO
Ocean Gas is a private firm with no debt and has 12 million shares outstanding, and it is about to issue 4 million new shares in an IPO
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Ocean Gas is a private firm with no debt and has 12 million shares outstanding, and it is about to issue 4 million new shares in an IPO. The IPO price has been set at $16 per share, and the underwriting spread is 8%. Assuming that the existing shareholders sell a half of their shares at the IPO, and the IPO is a big success so share price rises to $55 on the first day of trading. (i) How much is the total money raised from the IPO? (ii) How much is the existing shareholders receive through this IPO? (iii) Explain whether there is the underpricing situation in this IPO
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(i) Total money received raised from the IPO
Number of new shares issued = 4 million shares
IPO price = $ 16 per share
Underwriting spread = 8%
Money received = Number of shares issued * (IPO price - underwriting spread)
= 4 million * ( $ 16 - 8%)
= 4 million * 14.72
= $ 58.88 million
(ii) Amount received by existing shareholders
Number of shares sold = 6 million
Share price = $ 55
Amount received = 6 million * $55
= $ 330 million
(iii) IPO underpricing is a situation where closing price of share on first day of trading is higher than the closing offer price of the IPO.
In the given question, since closing price of share on first day of trading ( $ 55) is higher than the closing offer price of the IPO ( $ 16).
Therefore there is an underpricing situation in the IPO.
