Question

______     8.      Assume the offer price for an IPO is set at $25 per share and the shares issued in the IPO is 10 million. The lead underwriter, however, sells 11.5 million shares to investors at the $25 offer price, planning to use the overallotment option, if needed, to satisfy its short position. Assume that the IPO firm’s stock starts trading on the stock exchange at either $23 per share or $27 per share. In which of these two possible stock prices will the lead underwriter most likely exercise its overallotment option?

A. If the stock starts trading at $23 per share.

B. If the stock starts trading at $27 per share.

______     1.      The following are four dates that are related to a firm’s regular quarterly cash dividend equal to $1 per share. Assume you want to receive the $1 dividend, but you don’t currently own the stock. What is the latest day that you can buy the stock and still ensure that you will receive the $1 dividend? (Assume all the days listed below and all the days given in the possible answers are business days in which the stock market is open.)

Declaration date	Ex-Date	Record Date	Payment Date
Jan 31, 2018 (Wed)	Feb 14, 2018 (Wed)	Feb 15, 2018 (Thurs)	Feb 28, 2018 (Wed)

______     2.      Assume a company pays a $2.5 dividend. The stock’s price is $20 per share on the day before the stock’s ex-dividend day and $19 on the ex-dividend date. What is the stock’s return for this one-day period?

Answer 1

8. A. If the stock starts trading at $23 per share.

The lead underwriter will most likely exercise the over allotment option, if the stock starts at $23 per share. The purpose of issuing the extra shares is to stabilize the price of the stock and prevent it from going below the offer price of $25 per share. If the share price drops below the offering price, the underwriters can buy back some of the shares for less than they were sold, by reducing the supply and hopefully increasing the price.

However, if the stock price goes above the offering price, the over allotment option allows the lead underwriter to buy back some of the excess shares at the offering price of $25 so that they don't lose money.

1. The latest date you can buy the stock and still ensure you receive the $1 dividend is the Record Date - Feb 15th, 2018 (Thurs). The record date is the cut off date in order to determine which shareholders are eligible for a dividend or not. The record date is exactly one day after the ex-dividend date. As it takes 2 days to settle the transaction after it is carried out, by buying the stock on the ex-dividend date, will not make him eligible for a dividend.

2. The stock's return for this one day period is $3.5. This is because the value of the stock on the ex-dividend date is $19 only and it doesn't include the $2.5 as stocks purchased on that date are not eligible for a dividend. However, the value of the stock held one day before the ex-dividend day is $20 and also $2.5 dividend, making it $22.50.