Use the following information to answer the question(s)below.
Wyatt Oil has 8 million shares outstanding and is about to issue 10 million new shares in an IPO.The IPO price has been set at $15 per share,and the underwriting spread is 6%.The IPO is a big success with investors,and the share price rises to $35 on the first day of trading.
-The total cost to the firm's original investors due to the market imperfections from the IPO is closest to:

Question

Quizplus · Accepted Answer

Before the IPO, the firm had 8 million outstanding shares. After the IPO, there are 18 million shares outstanding (8 million + 10 million). The firm raised $150 million in total from selling the 10 million new shares (10 million x $15 per share). The underwriting spread of 6% means that the underwriters received $9 million ($150 million x 6%) and the firm received $141 million ($150 million - $9 million).

On the first day of trading, the market price jumped to $35 per share. The company's original investors lost potential gains on the 10 million shares that they could have sold at the higher market price. The total cost to these investors is therefore 10 million shares x ($35 market price - $15 IPO price) = $200 million.

Adding the cost to the firm's original investors to the underwriting spread, the total cost due to market imperfections from the IPO is $200 million + $9 million = $209 million, which is closest to answer B.

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