Question

1. You just started at a new

position at a large investment

bank. You have been assigned

to help a senior analyst, Ms. Jones, on a

Dutch Auction of shares for Thornton & Danaher

Inc. The equity of the firm is currently closely held by the founding families and the

senior managers, so there is no available ma

rket price. They are hoping to raise about

$300,000,000. This represents about 20% of the fi

rm’s current equity value. Ms. Jones

has estimated that the firm equity

is currently wo

rth about $1,575,000,000 ($300,000,000

is about 20%). Of course, this is just an

estimate, and the amount raised will depend on

what the market will bear. They have decided to auction 10,200,000 shares, which will

hopefully

sell for about $30 per share. Thor

nton & Danaher will receive the proceeds

from the sale of 10,000,000 of the shares, and

your investment ba

nk will receive the

proceeds from the remaining 200,000 shares (a 2% commission).

Your firm pitched the issue to several large pr

ivate equity clients.

Fourteen sealed bids

were submitted, and you have sorted them by bid price. The results are shown below.

Bidder

Price

Shares

A

$41.43

675,000

B

$40.87

640,000

C

$40.12

670,000

D

$38.93

720,000

E

$36.73

880,000

F

$35.37

1,040,000

G

$33.12

1,350,000

H

$31.54

1,500,000

I

$30.37

950,000

J

$29.42

1,475,000

K

$28.14

1,400,000

L

$27.52

1,500,000

M

$25.73

1,600,000

N

$24.28

1,850,000

What marginal price will the 10,200,000 shares

of Thornton & Danaher sell at in the

Dutch Auction? Also, calculate the pro rata

portion of shares that

the winning bidders

will receive for the number

of shares they bid.

How much money will Thornton & Danaher rece

ive from the auction? What will your

investment bank receive?

Answer 1

based on the dutch auction, the price is reduced until the bid is received for required no of shares.

So bid is for 10,200,000 shares so up to J bid is considered as after it bid for cumulative shares will be higher than 10200000.So marginal price = $29.42

Out of 9900000, 2% will be paid to investment bankers

For investment banker = 2%*9900000 = 198000

Money received = 198000*29.42 = $5825160

For Thornton & Danaher = 9900000-198000 = 9702000

Money received = 29.42*9702000 = $ 285432840