Question 3 (10 marks) Atlas Pty Ltd needs $50 million for its next growth phase.

Question

Question 3 (10 marks) Atlas Pty Ltd needs $50 million for its next growth phase. It plans to raise the money by an Initial Public Offering (IPO) of shares and has provided the following information to the market The first dividend of $2.50 will be paid next vear After that dividend, dividends are expected to grow annually by 4% per annum, in perpetuity The underwriters will charge a 7 per cent spread. Assume shareholders require a return of 16% per annum (effective annual rate). a) Calculate the intrinsic value of a share in Atlas (3 marks) b) If the offer price to the public is $16.00 per share, calculate the number of shares that Atlas will need to issue to achieve its goal (of $50million, net of the underwriter's fee) (3 marks)

Explanation / Answer

Using the Gordan growth formula for calculating value of share. Also adjustment for underwriting spread

Price =

Price ( 1 - Floatation Cost ) = D1 / ( Ke - G )

= 2.50 / ( 16% - 4 % ) = $ 20.83

Adjustment for spread = 20.83 ( 1 - 7% ) = 19.37

B) Target Amount = $ 50 Million

Net proceeds = 16 ( 1- 7% ) = 14.88

Number of Shares = 50 / 14.88 = 3.3602 Million Shares

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