Question

The following information applies for parts d), e) and f). A company makes an initial public offering of shares to raise $250 million, at an offer price of $3.90 per share. The issue is underwritten at $3.50. The costs of preparing the prospectus, legal fees, ASIC registration and other administrative costs add up to $600,000. The firm’s share price closes at $4.10 on its first day of trade.

d) Calculate the IPO underwriting spread. (1 mark)

e) Calculate the IPO underpricing. (1 mark)

Two years later, the company wants to raise another $28.3 million to finance a new investment project through a seasoned equity offering at $55 per share, and the underwriter charges a 8% spread.

f) How many shares have to be issued through the SEO?

g) Discuss two advantages for firms to raise capital through seasoned equity offerings, as compared with an IPO.

Answer 1

Solution:

Size of the IPO = $250 million

Offer price = $3.90

Number of shares that will be issued = 250 /3.90 = 64,102,564 Shares

Part D )

Underwriting spread per share = :offer price - underwriter's price = 3.90-3.50 = $0.40

Total cost of underwriting = $0.40 * 64,102,564 = 25,641,025.6

Part E )

Underpricing per share = $4.10 - $3.90= 0.20 per share

total underpricing = $0.20 * 64,102,564 = $12,820,512.8

Part F)

New issue  = $28.3 million

Offer price = $55 and underwriter charges an 8% spread hence effective price that the company will receive = 55 * (1-0.08) = $50.6

Number of shares required = $28.3 million / $50.6 =  559,288.53 = 559289 shares

Part G) Two advantages of raising the capital through season equity offering are-

1. Prices are known: Unlike IPO the share prices of the company are known and the company can fix the offer price according to the prevailing share price in the market.

2. Seasoned offerings are relatively easier than the IPOs as the company is now known to many shareholders and the public.