Question

XYZ used an investment bank to do IPO. In IPO, XYZ sold 1 million shares at $66.52 each. The investment bank charged 7% spread. At the end of the 1st day of trading, XYZ stock price closed at $72.63. Calculate the total cost of IPO. That is, what is the sum of direct and indirect cost?

Answer 1

Solution:
	Total Cost of IPO is   $10,766,400
	(which is the sum of Direct & indirect cost of IPO)
Working Notes:
	Total Cost of IPO = IPO Direct cost + IPO Indirect cost
	IPO Direct cost is the cost which is bank spread and cost to make IPO happen like accountant, experts etc..
	IPO Direct cost = Spread % x issued price x Number of shares
	IPO Direct cost = 7% x $66.52 x 1,000,000
	IPO Direct cost =$4,656,400
	Indirect cost is underpricing of Issue and Management IPO administrative cost.
	IPO Indirect cost = underpricing cost of Issue
	Underpricing per share = Price of stock at end of first day - Issue price
	=$72.63 - $66.52
	=$6.11 per share
	underpricing cost of Issue = Underpricing per share × No. of share outstanding
	underpricing cost of Issue = $6.11 x 1,000,000
	underpricing cost of Issue =$6,110,000
Hence	IPO Indirect cost = underpricing cost of Issue
	IPO Indirect cost = $6,110,000
	Total Cost of IPO = IPO Direct cost + IPO Indirect cost
	Total Cost of IPO = $4,656,400+ $6,110,000
	Total Cost of IPO = $10,766,400
Please feel free to ask if anything about above solution in comment section of the question.