IPO pricing: InfoNeed Ltd issues a $38.6 million IPO priced at $12.50 per share, and the offering price to the public is $19.30 per share. The company's legal fees, ASIC registration fees, and other administrative costs are $270,000. The company's share price increases 18 per cent on the first day. What is the underpricing cost of issuing the securities to the company?

Question

Quizplus · Accepted Answer

The total cost of issuing the securities to the company can be calculated using the following formula:

Total cost = IPO proceeds - (underwriting fees + legal fees + registration fees + other administrative costs)

IPO proceeds = $38.6 million
Underwriting fees = (0.07 x $38.6 million) = $2.702 million
Legal fees + registration fees + other administrative costs = $270,000

Therefore,

Total cost = $38.6 million - ($2.702 million + $270,000) = $35.628 million

The underpricing cost can be calculated using the following formula:

Underpricing cost = (offer price - IPO price) x number of shares issued

IPO price = $12.50 per share 
Offer price = $19.30 per share 
Number of shares issued = $38.6 million / $12.50 per share = 3,088,000 shares

Therefore,

Underpricing cost = ($19.30 - $12.50) x 3,088,000 shares = $20.976 million

Since the underpricing cost is higher than the total cost, it means that the company incurred a cost of $6.95 million by underpricing its securities. Hence, the best choice is C.

IPO Pricing: InfoNeed Ltd Issues a $38