404 Part Four Financing Decisions and Market Efficiency
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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.
a. What were the proceeds of the issue to the company? To the shareholders?
b. How much commission did the underwriters receive?
c. How much money was left on the table?
d. What was the cost of the underpricing to the selling shareholders?- IPOs Refer to the Marvin Prospectus Appendix at the end of this chapter to answer the fol-
lowing questions.
a. If there is unexpectedly heavy demand for the issue, how many extra shares can the under-
writer buy?
b. How many shares are to be sold in the primary offering? How many will be sold in the
secondary offering?
c. One day post-IPO, Marvin shares traded at $105. What was the degree of underpricing?
How does that compare with the average degree of underpricing for IPOs in the United
States?
d. There are three kinds of cost to Marvin’s new issue—underwriting expense, administra-
tive costs, and underpricing. What was the total dollar cost of the Marvin issue? - IPOs Find the prospectus for a recent IPO. How do the issue costs compare with (a) those
of the Marvin issue and (b) those shown in Table 15.3? Can you suggest reasons for the
differences?
CHALLENGE- Venture capital
a. Why do venture capital companies prefer to advance money in stages? If you were the
management of Marvin Enterprises, would you have been happy with such an arrange-
ment? With the benefit of hindsight did First Meriam gain or lose by advancing money in
stages?
b. The price at which First Meriam would invest more money in Marvin was not fixed in
advance. But Marvin could have given First Meriam an option to buy more shares at a
preset price. Would this have been better?
c. At the second stage Marvin could have tried to raise money from another venture capital
company in preference to First Meriam. To protect themselves against this, venture capital
firms sometimes demand first refusal on new capital issues. Would you recommend this
arrangement? - Auctions Explain the difference between a uniform-price auction and a discriminatory
auction. Why might you prefer to sell securities by one method rather than another? - Dilution Here is recent financial data on Pisa Construction, Inc.
Pisa has not performed spectacularly to date. However, it wishes to issue new shares to obtain
$80,000 to finance expansion into a promising market. Pisa’s financial advisers think a stock
issue is a poor choice because, among other reasons, “sale of stock at a price below book
value per share can only depress the stock price and decrease shareholders’ wealth.” To prove
the point they construct the following example: “Suppose 2,000 new shares are issued at $40Stock price $40 Market value of firm $400,000
Number of shares 10,000 Earnings per share $4
Book net worth $500,000 Return on investment 8%