Fortune Hotels issues an IPO on a best-effort basis. The company's investment bank demands a spread of 20 percent of the selling price. Five million shares are issued. The average selling price remains at $31. What are the net proceeds per share for the issuer?

Question

Quizplus · Accepted Answer

The investment bank's spread is 20% of the selling price, so the actual price paid by investors will be $31 + (20% of $31) = $37.20 per share. 
Thus, the net proceeds per share for the issuer will be $31 - $37.20 = -$6.20. 
However, since the issuer is selling 5 million shares, the total net proceeds will be: 5 million x (-$6.20) = -$31 million. 
In other words, the issuer will actually lose money by issuing the IPO.

Fortune Hotels Issues an IPO on a Best-Effort Basis