Use the table for the question(s)below.
David founds a company and goes through the investment rounds shown below:
He decides to take the company public through an IPO,issuing 2 million new shares.Assuming that he successfully completes the IPO,the net income for the next year is estimated to be $8 million.His banker informs him that the price of shares should be set using average price-earnings ratios for similar businesses,which is 15.0.
-An IPO is offered at $17 per share for 3 million shares.The IPO underwriters had a spread of 7%.What price did the underwriters pay per share of the IPO firm?

Question

Use the table for the question(s)below.
David founds a company and goes through the investment rounds shown below:
  He decides to take the company public through an IPO,issuing 2 million new shares.Assuming that he successfully completes the IPO,the net income for the next year is estimated to be $8 million.His banker informs him that the price of shares should be set using average price-earnings ratios for similar businesses,which is 15.0.
-An IPO is offered at $17 per share for 3 million shares.The IPO underwriters had a spread of 7%.What price did the underwriters pay per share of the IPO firm?

Quizplus · Accepted Answer

The total amount raised in the IPO is 3 million shares x $17 per share = $51 million.
The underwriters' spread is 7%, which means they keep 7% of the proceeds as commission, and the remaining amount goes to the company.
Therefore, the amount received by the company is 100% - 7% = 93% of $51 million = $47.43 million.
The number of shares held by the underwriters is $51 million / $17 per share = 3 million shares.
The price paid by the underwriters is the amount they received divided by the number of shares they hold, which is $47.43 million / 3 million shares = $15.81 per share. Therefore, the correct answer is (C).

Use the Table for the Question(s)below