Question
In: Finance
A winery decided to raise capital through IPO. The company has 1000 shares outstanding, and each...
A winery decided to raise capital through IPO. The company has 1000 shares outstanding, and each was valued at $100. CEO proposed to issue 1000 more shares. The IB set the offering price at $100 a share, the shares opened at $100, and quickly jumped to $130, the closing price on the first day of trading was $110. What was the underpricing? What is the total market value of equity in the winery after the IPO?
10%, 210 000?
30%, 210 000?
30%, 220 000?
10%, 220 000?
Solutions
Expert Solution
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Correct Answer: Option D) 10%, 220 000
Working:
The underpricing of the IPO issue can be calculated using,
Underpricing = ((Pm - P0) / P0) X 100
Where,
- Pm = Price of stock at the end of the first date
- P0 = Issue price of the stock
Parameters from the question :
Offering price, P0 = $100
Closing price on the first day of trading, Pm = $110
Substituting in the formula
Underpricing of winery = ((Pm - P0) / P0) X 100
Underpricing of winery = ((110 - 100) / 100) X 100
Underpricing of winery = (10 / 100) X 100
Underpricing of winery = 10%
The total market value of equity in the winery after the IPO,
The total market value of the equity = Total share outstanding X Price of stock at the end the first date
Substituting in the formula,
The total market value of the equity = (1000 + 1000) X 110
The total market value of the equity = (2000) X 110
The total market value of the equity = $ 220 000
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