Essentials of Corporate Finance
8th Edition
ISBN: 9780078034756
Author: Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Question
Chapter 15, Problem 8CTCR
Summary Introduction
To determine: Whether the assistant professor had a bad luck or should the professor have expected to do worse than the average initial public offering.
Introduction:
The private companies offer their stock for the first time to the public and this offering is termed as the initial public offerings. The private company that desire to become a publicly traded company usually offers the initial public offerings. The sale of the stocks below the true value is the underpricing.
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Having heard about IPO underpricing, I put in an order to my broker for 1,000 shares of every IPO he can get for me. After 3 months,
my investment record is as follows:
IPO
A
B
C
D
Shares
Allocated
to Me
500
200
1,000
0
Average underpricing
Price per
Share
$10
20
8
12
a. What is the average underpricing in dollars of this sample of IPOs? (Do not round intermediate calculations. Round your answer to
2 decimal places.)
Average initial return
Initial
Return
7%
12
2
23
b. What is the average initial return on my "portfolio" of shares purchased from the four IPOs that I bid on? When calculating this
average initial return, remember to weight by the amount of money invested in each issue. (Do not round intermediate calculations.
Enter your answer as a percent rounded to 1 decimal place.)
%
DRK, incorporated, has just sold 100,000 shares in an initial public offering. The underwriter’s explicit fees were $60,000. The offering price for the shares was $40, but immediately upon issue, the share price jumped to $44. What is the total cost to DRK of the equity issue?
Barnegat Light sold 150,000 shares in an initial public offering. The underwriter's explicit fees were $ 60,000. The offering price for the shares was $30, but immediately upon issue, the share price jumped to $38. What is the best estimate of the total cost to Barnegat Light of the equity issue?
Chapter 15 Solutions
Essentials of Corporate Finance
Ch. 15.1 - What is venture capital?Ch. 15.1 - Prob. 15.1BCQCh. 15.2 - Prob. 15.2ACQCh. 15.2 - Prob. 15.2BCQCh. 15.3 - Prob. 15.3ACQCh. 15.3 - Prob. 15.3BCQCh. 15.4 - Prob. 15.4ACQCh. 15.4 - Prob. 15.4BCQCh. 15.5 - Prob. 15.5ACQCh. 15.5 - Prob. 15.5BCQ
Ch. 15.6 - Prob. 15.6ACQCh. 15.6 - Prob. 15.6BCQCh. 15.7 - Prob. 15.7ACQCh. 15.7 - Prob. 15.7BCQCh. 15.8 - Prob. 15.8ACQCh. 15.8 - Prob. 15.8BCQCh. 15.9 - Prob. 15.9ACQCh. 15.9 - Prob. 15.9BCQCh. 15 - Prob. 15.1CCh. 15 - Prob. 15.2CCh. 15 - Prob. 15.3CCh. 15 - Prob. 15.4CCh. 15 - Prob. 15.5CCh. 15 - What has been presented as a reason why stock...Ch. 15 - Prob. 15.7CCh. 15 - Prob. 15.8CCh. 15 - Prob. 15.9CCh. 15 - Debt versus Equity Offering Size. In the...Ch. 15 - Debt versus Equity Flotation Costs. Why are the...Ch. 15 - Prob. 3CTCRCh. 15 - Prob. 4CTCRCh. 15 - Prob. 5CTCRCh. 15 - Prob. 6CTCRCh. 15 - Prob. 7CTCRCh. 15 - Prob. 8CTCRCh. 15 - Prob. 9CTCRCh. 15 - Prob. 10CTCRCh. 15 - Prob. 1QPCh. 15 - Prob. 2QPCh. 15 - Prob. 3QPCh. 15 - Prob. 4QPCh. 15 - Prob. 5QPCh. 15 - Prob. 6QPCh. 15 - Prob. 7QPCh. 15 - Prob. 1CCCh. 15 - Prob. 2CCCh. 15 - Prob. 3CCCh. 15 - Prob. 4CC
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- DRK, Incorporated, has just sold 80,000 shares in an initial public offering. The underwriters explicit fees were $48,000. The offering price for the shares was $64, but immediately upon issue, the share price jumped to $68.00. Required:a. What is the total cost to DRK of the equity issue?arrow_forwardFBN Inc. has just sold 100,000 shares in an initial public offering. The underwriter’s explicit fees were $70,000. The offering price for the shares was $50, but immediately upon issue, the share price jumped to $53.a. What is your best guess as to the total cost to FBN of the equity issue?b. Is the entire cost of the underwriting a source of profit to the underwriters?arrow_forwardAt the time of starting its business, a company has only a cash account of $120,000 and a common stock account of $120,000 (par value: $1 each). The company issues new shares of $20,000 to the public at a price of $3. However, after the public offering, the share prices decline to $2.3. The company decides to buy back 8,000 of its shares. Assuming that the company applies par value method for accounting for treasury shares, what would be the total shareholders’ equity in the balance sheet at the end of all of these transactions? A) $41,600 B) $158,400C) $161,600D) $172,000E) Other (please specify)arrow_forward
- An IPO was offered to the public at $18 a share with the issuing firm receiving $16.50 of that amount. The issuer incurred $850,000 in legal and administrative costs. At the end of the first trading day, the stock was priced at $22.40 a share. What was the total dollar cost, including both direct and indirect costs, of issuing the securities if 225,000 shares were offered?arrow_forward2. An analyst for Acme, R. Runner, has recommended that Peter the Anteater purchase shares in a private firm (a firm that is not traded on any exchange) called Dynamite Corp. Dynamite has 30% debt and 70% equity. R. Runner believes that Dynamite will generate a return of 10% over the next year. Since Y. Lee is new to the job, he decides to do a little research on his own. He finds a company, Explosions Unlimited, that has very similar business as Dynamite. Explosions has an equity beta of 1.05 and is composed of 40% debt and 60% equity. Should Peter the Anteater buy the stock? The expected return on the market is 12% and the expected risk-free rate is 5%.arrow_forwardHaving heard about IPO underpricing, I put in an order to my broker for 1,000 shares of every IPO he can get for me. After 3 months, my investment record is as follows: IPO A B С Shares Allocated to Me 580 200 1,000 Price per Share $10 20 8 12 Initial Return 7% 12 - 2 23 a. What is the average underpricing in dollars of this sample of IPOs? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Answer is complete but not entirely correct. Average underpricing 0.10arrow_forward
- After researching Valero Energy common stock, Sandra Pearson is convinced the stock is overpriced. She contacts her account executive and arranges to sell short 370 shares of Valero Energy. At the time of the sale, a share of common stock has a value of $39. Three months later, Valero Energy is selling for $29 a share, and Sandra instructs her broker to cover her short transaction. Total commission to buy and sell the stock were $82. What is her profit for this short transaction?arrow_forwardA firm goes public. The firm receives $36.50 for each of the 7.25 million shares sold. The initial offering price was $38.75 per share, and the stock rose to $42.65 per share is the first few minutes of trading. The firm paid $2,285,000 in direct legal and other costs and $988,000 in indirect cost. What was the total for underpricing of this offer?arrow_forwardHaving heard about IPO underpricing, I put in an order to my broker for 1,110 shares of every IPO he can get for me. After 3 months, my investment record is as follows: IPO Shares Allocatedto Me Price per Share Initial Return A 610 $ 12 7 % B 310 20 13 C 1,110 10 − 2 D 0 14 20 a. What is the average underpricing in dollars of this sample of IPOs? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What is the average initial return on my “portfolio” of shares purchased from the four IPOs that I bid on? When calculating this average initial return, remember to weight by the amount of money invested in each issue. (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)arrow_forward
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