IPO pricing: Black Stump, Ltd., a technology company in St Kilda, Melbourne, issues a $66 million IPO priced at $17 per share, and the offering price to the public is $22 per share. The company's legal fees, ASIC registration fees, and other administrative costs are $350,000. The company's share price increases 15 per cent on the first day. What is the underpricing spread?

Question

Quizplus · Accepted Answer

The underpricing spread is the difference between the offering price and the first-day closing price.

First, we need to find the total number of shares issued:

Total amount raised from IPO = $66 million
Offering price per share = $22
Total number of shares issued = $66 million / $22 = 3 million shares

The total amount of money raised from the IPO is:

3 million shares x $22 per share = $66 million

The total costs associated with issuing the IPO are $350,000.

So, the total amount of money the company received from the IPO is:

$66 million - $350,000 = $65.65 million

On the first day, the share price increased by 15%, so the closing price was:

$22 x 1.15 = $25.3

The underpricing spread is:

$25.3 - $22 = $3.3 per share

The total underpricing spread is:

3 million shares x $3.3 per share = $9.9 million

However, the question is asking for the underpricing spread as a percentage of the total amount raised from the IPO, not the total underpricing spread:

$9.9 million / $66 million = 0.15 or 15%

Therefore, the underpricing spread is $15 million (B).

IPO Pricing: Black Stump, Ltd