Question

Mark Sexton and Todd Story have been discussing the future of S&S Air. The company has been experiencing fast growth, and the two see only clear skies in the company’s future. However, the fast growth can no longer be funded by internal sources, so Mark and Todd have decided the time is right to take the company public. To this end, they have entered into discussions with the investment bank of Crowe & Mallard. The company has a working relationship with Renata Harper, the underwriter who assisted with the company’s previous bond offering. Crowe & Mallard have assisted numerous small companies in the IPO process, so Mark and Todd feel confident with this choice. Renata begins by telling Mark and Todd about the process. Although Crowe & Mallard charged an underwriter fee of 4 percent on the bond offering, the underwriter fee is 7 percent on all initial stock offerings of the size of S&S Air’s offering. Renata tells Mark and Todd that the company can expect to pay about $1,800,000 in legal fees and expenses, $12,000 in SEC registration fees, and $15,000 in other filing fees. Additionally, to be listed on the NASDAQ, the company must pay $100,000. There are also transfer agent fees of $6,500 and engraving expenses of $520,000. The company should also expect to pay $110,000 for other expenses associated with the IPO. Finally, Renata tells Mark and Todd that to file with the SEC, the company must provide three years’ audited financial statements. She is unsure about the costs of the audit. Mark tells Renata that the company provides audited financial statements as part of the bond covenant, and the company pays $300,000 per year for the outside auditor.

a. At the end of the discussion, Mark asks Renata about the Dutch auction IPO process. What are the differences in the expenses to S&S Air if it uses a Dutch auction IPO versus a traditional IPO? Should the company go public through a Dutch auction or use a traditional underwritten offering?

b. During the discussion of the potential IPO and S&S Air’s future, Mark states that he feels the company should raise $75 million. However, Renata points out that if the company needs more cash in the near future, a secondary offering close to the IPO would be problematic. Instead, she suggests that the company should raise $90 million in the IPO. How can we calculate the optimal size of the IPO? What are the advantages and disadvantages of increasing the size of the IPO to $90 million?

c. Many employees of S&S Air have shares of stock in the company because of an existing employee stock purchase plan. To sell the stock, the employees can tender their shares to be sold in the IPO at the offering price, or the employees can retain their stock and sell it in the secondary market after S&S Air goes public. Todd asks you to advise the employees about which option is best. What would you suggest to the employees?

d. 5 years after IPO, S&S Air is planning to raise fresh equity capital by selling a large new issue of common stock. S&S Air is currently a publicly traded corporation, and it is trying to choose between an underwritten cash offer and a rights offering (not underwritten) to current shareholders. S&S Air management is interested in minimizing the selling costs and has asked you for advice on the choice of issue methods. What is your recommendation and why?

Answer 1

1.
The company is already paying audit fee of $300000 the cost and can remail same just in case of dutch auction ipo. however the corporate ought to choose dutch auction ipo because it can provides a true image of what quantity the market is willing to buy the shares of the corporate and what's verity perception of the worth of company in minds of investorss. It additionally result in the best worth at that full range of shares is sold within the market.

2.
The advantage of increasing the scale of the ipo is that the corporate can have plentiful funds to finance its future capital investemnts however the downside is that the larger the amount of shares the corporate releases, the lower are going to be the value, as troubled auction ipo of all the shares is that the least price at that last share that is assigned was bid at. that the larger the amount of shares or the larger the ipo price, the lower are going to be the share worth.
Optimal size of the ipo is that the worth at that the true price of company is represented and most range of shares which might be sold at that worth considering the demand of the shares. whereas the best size one should think about the best worth and demand of shares in this worth.

3.
Many employees of S&S Air have shares of stock within the company as a result of o stock purchase arrange.
To sell the stock, the workers will tender their shares to be sold worth, or the workers will retain their stock and sell it within the secondary market once S&S asks you to advise the workers concerning that choice is best. What would you sugge There area unit advantages and drawbacks to every

. If the worker tends the stock to be sold within the ipo, the worker can lose out on any underpricing. Th significant price. However, if the worker retains the stock, he/she should hold the lockup amount, generally a 180 days to boot, throughout the lockup amount, the employees prohibited from hedging the value risk of the stock with any derivatives.

And heavy insiders is taken into account a negative signal by the market. Another risk in not commerce in once the lockup amount expires, the workers is also thought of insiders, subject to restrictions on common stock. dutch auction ipo process.