A firm is making an initial public offering. The investment bankers agree to a firm underwriting commitment of 500,000 shares priced to the public at $50 a share. The underwriter's spread is 12%. In addition, the underwriter charges $600,000 in legal fees. On the first day of trading, the firm's stock closed at $61. What were the total costs of the issue?

Question

Quizplus · Accepted Answer

The total costs include the underwriter's spread and legal fees. The spread is 12% of $50 per share for 500,000 shares, which is $3,000,000. Adding the legal fees of $600,000 gives $3,600,000. The opportunity cost due to underpricing (closing price $61 - offer price $50) is $11 per share for 500,000 shares, totaling $5,500,000. The total cost is $3,600,000 + $5,500,000 = $9,100,000.

A Firm Is Making an Initial Public Offering