Suppose that in April 2019, Van Dyck Exponents offered 100 shares for sale in an

Question

Suppose that in April 2019, Van Dyck Exponents offered 100 shares for sale in an IPO. Half of the shares were sold by the company and the other half by existing shareholders, each of whom sold exactly half of their existing holding. The offering price to the public was $50 and the underwriters received a spread of 7%. The issue was heavily oversubscribed and on the first day of trading the stock price rose to $160.

1) How much money was left on the table? 2) What was the cost of the underwriting to the selling shareholders?

Explanation / Answer

Total number of shares sold= 100

Offering price= $50

So, total money obtained from the public= 50*100= $5000

It is given that the underwriters received a spread of 7 percent, which is calculated as a percent of the proceeds.

1. So, the money left on the table= 0.93*5000= $4650

2. The cost of underwriting is distributed between shareholders and the company in ratio of 1:1.

So, explicit cost to shareholders= 0.07*5000/2= $175

But there is also an implicit cost to the shareholders as they have a stake in the company too. It is given that half of the 100 shares were sold by existing shareholders, each of whom sold exactly half of their existing holding.

So, their current holding= 50 shares

Total shares of the company currently= 150 shares

So, the one third of the cost of the company would be borne by the existing shareholders.

Implicit cost to the existing shareholders= (1/3)*175= $58.33

So, total cost of underwriting to the selling shareholders= $175+58.33= $233.33

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