IPO: Lucky Fortune Hotels issues an IPO sold on a best-efforts basis. The company's investment bank demands a spread of 20 per cent. Five million shares are issued. However, the bank was overly optimistic and could not sell at the offer price of $31. If the net proceeds to the issuer is $110 million, how much did the investment bank receive?

Question

Quizplus · Accepted Answer

The investment bank demanded a spread of 20%, which means they would receive 20% of the offer price of $31 for each share sold. This equals a spread of $6.20 per share. If the bank did not sell all five million shares at $31, then the actual sale price must have been lower. Let's assume the bank sold all of the shares at a sale price of $28. This means the spread would be $3.20 per share.

To calculate how many shares the bank sold at $28, we can divide the net proceeds to the issuer ($110 million) by the sale price ($28) plus the spread ($3.20).

$110 million divided by ($28 + $3.20) equals 3,048,780 shares sold.

The total spread received by the bank is then calculated by multiplying the spread ($3.20) by the number of shares sold (3,048,780).

This equals $9,756,780, which is approximately 8.8% of the net proceeds to the issuer. Therefore, the investment bank received $27.5 million (20% of the offer price) minus $9,756,780, which equals approximately $17.74 million.

IPO: Lucky Fortune Hotels Issues an IPO Sold on a Best-Efforts