Question

A company is going public at $20 and will use the ticker XYZ. The underwriters will charge a 7 percent spread. The company is issuing 16 million shares, and insiders will continue to hold an additional 32 million shares that will not be part of the IPO. The company will also pay $2.5 million of audit fees, $3.5 million of legal fees, and $900,000 of printing fees. The stock closes the first day at $23. What are the total costs of going public for XYZ as a percentage of the total pre-cost equity value? In calculating the pre-cost equity value, use the closing price of the stock at the end of the first day as the pre-cost equity value. Include underpricing in the calculation of the total costs of the offering. Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

First calculate the underwriter charges.

The formula to calculate the underwriter charges is given below:

Underwriter charges = Number of shares Issue price of share Percentage of spread

Substitute 16 million for number of shares, $20 for issue price of share and 7% for percentage of spread in the above formula,

Underwriter charges = 16 million $20 7%

= $22.4 million

The underpricing per share is easily obtain by the difference between issue price of share and its closing price.

Here, the closing price is $23 and issue price is $20, so the underprice per share will be $3.

There are total 16 million shares and underprice per share is $3. Thus, total amount of underpricing would be 16 million $3 = $48 million.

The formula to calculate total cost of offering is given below:

Total cost of offering = Underwriter charges + Underpricing + Legal fees + Audit fees + Printing fees

Substitute $22.4 million for underwriter charges, $48 million for underpricing, $3.5 million for legal fees, $2.5 million for audit fees and $0.9 million for printing fees in the above formula,

Total cost of offering = $22.4 million + $48 million + $3.5 million + $2.5 million + $0.9 million

= $77.3 million

It is given that closing price should be used to calculate the pre-cost equity value. The total pre-cost equity value is calculated below:

Pre-cost equity value = Number of shares Share price

= 16 million $23

= $368 million

The total costs of going public as percentage of total pre-cost equity is calculated below: