Problem 18-5 Pricing Stock Issues in an IPO Zang Industries has hired the invest
ID: 2728232 • Letter: P
Question
Problem 18-5
Pricing Stock Issues in an IPO
Zang Industries has hired the investment banking firm of Eric, Schwartz, & Mann (ESM) to help it go public. Zang and ESM agree that Zang's current value of equity is $61 million. Zang currently has 3 million shares outstanding and will issue 1 million new shares. ESM charges a 6% spread.
What is the correctly valued offer price? Round your answer to the nearest cent.
$
How much cash will Zang raise net of the spread? Round intermediate calculations to two decimal places. Round your answer to three decimal places. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000.
$ million
Explanation / Answer
Current Market Value of Company's Shares = $ 61 Million / 3 Million
= $ 20.33
Fair offer Price for 1 share = $ 20.33 x 106%
= $ 21.55
Fair offer price for 1 Million shares = $ 21.55 x 1 Million
= $ 21.55 Million
Thus, Zang will raise $ 21.55 million - ($ 21.55 million / 106 x 6)
i.e. $ 20.33 Million net of spread