# Calculate Optimal Size Of Ipo

## IPO

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'Modern Financial Management'

I need someone assistance to answer the solution for the mini case in the attached document.

East Coast Yachts Goes Public
Larissa Warren and Dan Ervin have been discussing the future of East Coast Yachts. The company has been experiencing fast growth, and the future looks like clear sailing.

However, the fast growth means that the company's growth can no longer be funded by internal sources, so Larissa and Dan have decided the time is right to take the company public.

To this end, they have entered into discussions with the investment bank of Crowe & Mallard. The company has a working relationship with Robin Perry, the underwriter who assisted with the company's previous bond offering. Crowe & Mallard have helped numerous small companies in the IPO process, so Larissa and Dan feel confident with this choice.
Robin begins by telling Larissa and Dan about the process. Although Crowe & Mallard charged an underwriter fee of 4 percent on the bond offering, the underwriter fee is 7 percent on all initial stock offerings of the size of 'East Coast Yachts' initial offering.

Robin tells Larissa and Dan that the company can expect to pay about \$1,200,000 in legal fees and expenses, \$12,000 in SEC registration fees, and \$15,000 in other filing fees.

Additionally, to be listed on the NASDAQ, the company must pay \$100,000. There are also transfer agent fees of \$6,500 and engraving expenses of \$450,000.

The company should also expect to pay \$75,000 for other expenses associated with the IPO.
Finally, Robin tells Larissa and Dan that to file with the SEC, the company must provide three years' worth of audited financial statements.

She is unsure of the costs of the audit. Dan tells Robin that the company provides audited financial statements as part of its bond indenture, and the company pays \$300,000 per year for the outside auditor.
1.

## How an Initial Public Offering (IPO) Is Priced

At the end of the discussion Dan asks Robin about the Dutch auction IPO process. What are the differences in the expenses to East Coast Yachts if it uses a Dutch auction IPO versus a traditional IPO?

Should the company go public with a Dutch auction or use a traditional underwritten offering?

2. During the discussion of the potential IPO and East Coast Yachts' future, Dan states that he feels the company should raise \$50 million. However, Larissa points out that if the company needs more cash soon, a secondary offerings close to IPO would be potentially problematic.

## How Does IPO Pricing Work?

Instead she suggests that the company should raise \$80 million in the IPO. How can we calculate the optimal size of the IPO?

What are the advantages and disadvantages of increasing the size of the IPO to \$80 million?
3. After deliberation, Larissa and Dan have decided that the company should use a firm commitment offering with Crowe & Mallard as the lead underwriter.

## How to Calculate IPO

The IPO will be for \$60 million. Ignoring underpricing, how much will the IPO cost the company as a percentage of the funds received?

4. Many of the employees of East Coast Yachts have shares of stock in the company because of an existing employee stock purchase plan. To sell the stock, the employees can tender their shares to be sold in the IPO at the offering price, or the employees can retain their stock and sell it in the secondary market after East Coast Yachts goes public (once the 180 day lockup expires).

## Related BrainMass Content

What would you suggest to the employees?

#### Solution Preview

1.

At the end of the discussion Dan asks Robin about the Dutch auction IPO process. What are the differences in the expenses to East Coast Yachts if it uses a Dutch auction IPO versus a traditional IPO?

Oral b pro best option

Should the company go public with a Dutch auction or use a traditional underwritten offering?

The expenses in the case of Dutch Auction IPO will be quite less as compared to traditional IPO as the role of investment banker in this scenario is minimized.

Therefore, the investment banker's fee will be substantially reduced in the case of Dutch Auction IPO.

The decision to chose between Dutch auction versus a traditional IPO offering really depends on factors such confidence of the company to be able to secure a better pricing via the Dutch Auction IPO, current market conditions, etc.

## Purchase Solution

Well known and fairly large companies such as Google have successfully used Dutch Auction IPO method because the reputation and awareness about Google was huge. Therefore, East Coast Yachts would really need to weigh the pros and cons the Dutch Auction IPO by evaluating its brand reputation and awareness among small investors.

Therefore, in my opinion, the traditional IPO will be safer for companies such as East Coast Yachts that lack the awareness and reputation of large companies such as Google.

2. During the ...

#### Solution Summary

At the end of the discussion Dan asks Robin about the Dutch auction IPO process.