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ABC Corporation is condsidering an IPO. ABC has 12 million shares of common stock owned by...

ABC Corporation is condsidering an IPO. ABC has 12 million shares of common stock owned by its founder and early investors. ABC has no preferred stock, debt, or short-term investments. Based on its free cash flow projection, ABC's intrinsic value of operations is $210 million. ABC wants to raise $30 million (net of flotation costs) in net proceeds. The investment bank charges a 7% underwriting spread. All other costs associated with the IPO are small enough to be neglected in this analysis and all shares sold in the IPO will be newly issued shares. Answer the following questions.

Value of operations (VPre-IPO) $210 million
Number of existing shares (nExisting)    12 million
Target net proceeds $30 million
Flotation costs (F) 7%

1. Based on number of new shares sold in the IPO and the total amount paid by the new shareholders, what is the offer price?

- Offer price = POffer =

2. Based on total value of the company after the IPO and the total number of outstanding shares after the IPO, what is the intrinsic price per share after the IPO?

   - Price per share after the IPO = PPost-IPO =

3. Compare the pre-IPO price, the offer price, and the post-IPO price. Explain why they are similar of different. (No calculations are required.)

Solutions

Expert Solution

1. Offer price = Net proceeds/ Number of shares sold, In order to arrive at number of shares sold, it is essential to calculate pre IPO price of company's share. The pre IPO price = $210/ 12 million shares = $17.5.

Shares offered = $30 million / $17.5 = 1.7142 million shares

Offer price= $30 million/ 1.7142 million shares = $17.5

2. Total value of the after IPO = $210 million + $ 30 million = $240 million

Total number of shares outstanding = 12 million + 1.7142 million shares

Intrinsic price per share = $240 million/ 31.7142 million shares = $17.5

3. The pre IPO price, offer price and Post IPO price is same and stood at $17.5. This is because shares are offered in the IPO based on the current intrinsic value per share of company's assets. After the issue of shares at the current price, same Post IPO price will remain, because money is raised in the same price and number of shares are issued based on the pre IPO price. There can be change in such prices, if the money will be raised by issue of shares at premium or discount. However, such is not the case in this problem.

jeff jeffy answered 11 months ago
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