The BB Drum Co. recently raised several million dollars in an initial public offering. BB received $22 per share from the underwriter, the offering price was $25 per share, and the market price rose to $28 on the first day of trading. The spread paid by BB was _______.

Question

Quizplus · Accepted Answer

The spread is the difference between what the underwriter pays the company and the offering price, divided by the offering price. Here, it's ($25 - $22) / $25 = $3 / $25 = 0.12 or 12%. However, the correct calculation for the spread as a percentage of the proceeds received by the company (not of the offering price) would be $3 / $22 = 13.6%.