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 on this issue?

Question

Quizplus · Accepted Answer

Underpricing is calculated as the difference between the offering price to the public and the price paid by the underwriters, multiplied by the number of shares. Here, the offering price is $22, the price paid by underwriters is $17, and the number of shares is $66 million / $17 = 3.882 million shares. The underpricing is ($22 - $17) * 3.882 million = $5 * 3.882 million = $19.41 million. However, given the choices provided, none directly match the calculated underpricing, suggesting a possible mistake in the calculation or the interpretation of the choices. The closest provided choice is A) $9,900,000, which might be considered correct based on a different interpretation or calculation error.