Question

This company uses the Dutch auction system to sell its IPO. It wanted to sell 10 million shares and received the following bids from investors.

Bidder​ Bid​ Shares

1​ $40​ 2 million

2​ $37​ 7 million

3​ $36​ 2 million

4​ $34​ 10 million

16.   Which of the following statements is correct?

A   Every bidder received some shares.

B   Bidder #4 received 1 million shares

C   Every successful bidder paid the same price of $36.50

D   All of the above are incorrect.

17.​What price was charged from the successful bidders?

A.​$40

B.​$37

C.​$36.50

D.​$36

18.​If the total IPO costs amounted to 10%, what proceeds did the firm receive after all expenses?

A       $324 million

B. $360 million

C   $400 million

D.   None of the above.

19. Assuming shares were allocated on pro-rata basis. This means the successful bidders received about … of the shares they asked for.

A. 100%

B. 110%

C. 80%

D. 85%

E. 91% ​

Answer 1

Answer 1 )Option D is the corrrect option, let us understand it further

There are 10 millions shares to be sold and as per Dutch Auction process highest price bidder receives highest priority.

Therefore, $40 receives 2 millions shares, $37 bidder receives 7 million shares and $36 bidder 1 million shares hence neither of the option fulfills the requirement hence Ans D is the correct option.

Answer 2) Option D is the corrrect option, let us understand it further

As per dutch auction process, $40 receives 2 millions shares, $37 bidder receives 7 million shares and $36 bidder 1 million shares hence neither of the option fulfills the requirement hence Ans D is the correct option hence IPO priced at $36

Answer 3) Option D is the corrrect option, let us understand it further

Bidder	No of Share	Amount allocated
40	2 million	80 million
37	7 million	259 million
36	1 million	36 million
	IPO Amount	375 million

10% cost = 375 * 10% = 37.5 million

Proceeds receive after all expenses = IPO Amount - IPO Cost = 375 - 37.5 = $337.5 million

Answer 4) Option B is the corrrect option, let us understand it further

When the company decides to allot the shares at pro-rata basis, then it has to allot 10 million shares to the applicants of 21 million shares. Thus, the ratio will be 21:10 i.e. 2.1 which is 110%(i.e (21-10)/10 = 11/10 = 1.1 = 110%) above the alloted shares. Hence, an applicant for 2.1 shares will receive 1 share.