Problem 18-5 Pricing Stock Issues in an IPO Zang Industries has hired the invest
ID: 2728582 • 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 $63 million. Zang currently has 3 million shares outstanding and will issue 1.8 million new shares. ESM charges a 8% 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
Not 21 and 34.77 million
Explanation / Answer
Value of company Pre-IPO= $63 million
Existing number of shares = 3 million
Value per share = $63 million / 3 million = $21 per share
Net proceeds from issue of new shares = $21 * 1.8 million = $37.8 million
Floatation costs = 8%
Gross proceeds from issue of new shares = Net proceeds/(1-Floatation costs)= $37.8 million/(1-0.08)= $41.09 million
Value of company post-IPO =Value of company Pre-IPO + Net proceeds from issue of new shares= $63 million + $37.8 million = $100.80 million
% required= Gross proceeds/Value post-IPO = $41.09 million/$100.80 million = 0.4076
No. of shares to be issued = 0.4076*3 million/(1-0.4076)= 2.06 million
Correctly valued offer price = $41.09 million/2.06 million = $19.95 per share
Price per share net of spread= $19.95 * (1 - 0.08) = $18.35 per share
Cash raised from offer= $63 million /{(0.08 *1.8 million) + 4 million} = $15.20
Pnet of spread= $15.20*(1-0.08)= $13.98
Cash raised net of spread = $13.98 * 1.8 million = $25.17 million