Chapter 15 How Corporations Issue Securities 405
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and the proceeds are invested. (Neglect issue costs.) Suppose return on investment does not
change. Then
Book net worth = $580,000
Total earnings = .08(580,000) = $46,400Earnings per share =
46,400
______
12,000= $3.87Thus, EPS declines, book value per share declines, and share price will decline proportion-
ately to $38.70.”
Evaluate this argument with particular attention to the assumptions implicit in the numerical
example.Look up a recent IPO on http://www.hoovers.com or biz .ya hoo.com /ipo and then use the Edgar data-
base to find the prospectus. (You may find it easiest to look up the company on f ina nce.ya hoo.
com and use the link to SEC filings. In any case finding the final prospectus can be a matter
of trial and error.) Compare the IPO with that of Marvin. For example, who were the existing
shareholders? Was the company raising more capital or were existing shareholders selling? Were
existing shareholders prevented by a lock-up agreement from selling more shares? How did the
underwriting and other costs compare with those of Marvin? Did the underwriters have a green-
shoe option? Did the issue turn out to be underpriced? (The Yahoo! website should help here.) If
so, how much money was left on the table?
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