Stump, Inc. issues a $66 million IPO priced at $17 per share, and the offering price to the public is $22 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $350,000. The firm's stock price increases 15 percent on the first day. What is the underpricing spread?

Question

Quizplus · Accepted Answer

The underpricing spread is calculated as the difference between the offering price to the public and the first day's closing price.

The offering price to the public is $22 per share.

If the stock price increases 15 percent on the first day, the first day's closing price is: 
$22 + (15% x $22) = $25.30

Therefore, the underpricing spread is: 
$25.30 - $22 = $3.30 per share

The total number of shares issued in the IPO is: 
$66 million / $17 per share = 3,882,353 shares

So, the total underpricing spread is: 
$3.30 x 3,882,353 shares = $12.8 million

However, we need to subtract the firm's total costs (legal fees, SEC registration fees, and other administrative costs) from the underpricing spread: 
$12.8 million - $350,000 = $12.45 million

Therefore, the underpricing spread is $12.45 million, which is closest to answer B ($15 million).