DU Finance Fair Price & Current Valuation of Busines Questions

1. 

Beedles Inc. needed to raise $14 million in an IPO and chose Security Brokers Inc. to underwrite the offering. The agreement stated that Security Brokers would sell 3 million shares to the public and provide $14 million in net proceeds to Beedles. The out-of-pocket expenses incurred by Security Brokers in the design and distribution of the issue were $300,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answers to the nearest dollar. Loss should be indicated by a minus sign.

$4.75 per share?$  

$7 per share?$  

1. $4.25 per share?

2. 

The Beranek Company, whose stock price is now $35, needs to raise $22 million in common stock. Underwriters have informed the firm’s management that they must price the new issue to the public at $31 per share because of signaling effects. The underwriters’ compensation will be 7% of the issue price, so Beranek will net $28.83 per share. The firm will also incur expenses in the amount of $105,000. How many shares must the firm sell to net $22 million after underwriting and flotation expenses? Do not round intermediate calculations. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest whole number.

3. 

Benjamin Garcia’s start-up business is succeeding, but he needs $205,000 in additional funding to fund continued growth. Benjamin and an angel investor agree the business is worth $820,000 and the angel has agreed to invest the $205,000 that is needed. Benjamin presently owns all 45,000 shares in his business. Because the stock will be sold directly to an investor, there is no spread; the other flotation costs are insignificant.

1. What is a fair price per share? Do not round intermediate calculations. Round your answer to the nearest cent.

$  

How many additional shares must Benjamin sell to the angel? Do not round intermediate calculations. Round your answer to the nearest whole number.

shares

4. 

Pricing Stock Issues in an IPO

Zang Industries has hired the investment banking firm of Eric, Schwartz, & Mann (ESM) to help it go public. Zang and ESM agree that Zang’s current value of equity is $63 million. Zang currently has 4 million shares outstanding and will issue 1.8 million new shares. ESM charges a 9% spread.

What is the correctly valued offer price? Do not round intermediate calculations. Round your answer to the nearest cent.

$  

How much cash will Zang raise net of the spread (use the rounded offer price)? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest dollar.