Stump, Inc. a technology firm in Prairie View, Texas, issues a $66 million IPO priced at $17 per share, and the offering price to the public is $22 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $350,000. The firm's stock price increases 15 percent on the first day. What is the underpricing spread?

Question

Quizplus · Accepted Answer

Underpricing spread is calculated as the difference between the offering price to the public and the first day closing price. In this case, the offering price to the public is $22 per share, and the first day closing price is $25.30 ($22 x 1.15). Therefore, the underpricing spread is $25.30 - $22 = $3.30 per share. The number of shares issued in the IPO is $66 million ÷ $17 per share = 3,882,353 shares. Therefore, the underpricing spread for the entire IPO is $3.30 x 3,882,353 shares = $12,802,942. Deducting the administrative costs from this amount, we get the net underpricing spread, which is $12,802,942 - $350,000 = $12,452,942 or approximately $15 million, rounded to the nearest million.