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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.
a.) What is the underpricing spread?
b.) What is the underpricing on this issue?
c.) What is the firm's total cost of issuing the securities?

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Answer:

A) What is the underpricing spread?  $15,000,000

B) What is the underpricing on this issue?  $9,900,000

C) What is the firm's total cost of issuing the securities? $25,250,000

Explanation:

The total number of shares issued = $66,000,000 / $22 = 3,000,000 shares

A) The underpricing spread = (public price - issuing price) x 3,000,000 = ($22 - $17) x 3,000,000 = $5 x 3,000,000 = $15,000,000

B) Since the shares' price increased 15%, then the underpricing on this share issue = ($22 x 1.15%) x 3,000,000 = $3.30 x 3,000,000 = $9,900,000

C) the total cost of issuing shares = underpricing spread + underpricing of the shares + administrative costs = $15,000,000 + $9,900,000 + $350,000 = $25,250,000

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