West Coast Manufacturing Company (WCMC) is executing an initial public offering

Question

West Coast Manufacturing Company (WCMC) is executing an initial public offering with the following characteristics. The company will sell 10 million shares at an offer price of $25 per share, the underwriter will sell charge a 7% underqriting fee, and the shares are expected to sell for $32 per share by the end of the first-day's trading. Assuming this IPO is executed as expected, answer the following:
a. Calculate the initial return earned by investors who are allocated shares in the IPO.
b. How much will WCMC received from this offering?
c. What is the total cost (underwriting fee and underpricing) of this issue to WCMC?

Explanation / Answer

a) initial return of the investor = (32 -25)/25 *100 = 28% (ANSWER) b) WCMC receives = 10 * 25 - 10 *25 * 0.07 = 232.5 million dollars (ANSWER0 c) underwriting and under pricing cost = 10*25*0.07 + 10*(32-25) = 87.5 million dollars . (ANSWER)

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