[xodiana]

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 charge a 7 percent underwriting 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 allocated shares in the IPO

The book's answer was a 28% gain in one day which the only way I could get that answer was to divide 7%/$25

Or do you calculate the answer by:

100% - (25/32) which would give you 21.88% gain in one day

[jakester]

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 charge a 7 percent underwriting 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 allocated shares in the IPO

The book's answer was a 28% gain in one day which the only way I could get that answer was to divide 7%/$25

Or do you calculate the answer by:

100% - (25/32) which would give you 21.88% gain in one day

xodiana - you can simply take the sell price of the stock for the investors and divide it by the purchase price of $25 and subtract that by 1:

(32/25)-1: .28

I think you are trying to figure out what to do with the 7% underwriting fee and are getting confused with that. It's been a while but doesn't the book tell you that the underwriting fee is assessed after the funds have been taken in at the initial IPO? In other words, 10 million shares x $25 is $250,000,000 raised in capital; the underwriting fee then would amount to $17,500,000. This fee would have no impact on what the return to the investors was, though.

Let me know what the books says on that.