cautioned about being too greedy on price. They pointed out that indications from investors were not the same as firm orders. Also, they argued, it was much more important to have a successful issue than to have a group of disgruntled shareholders. They therefore suggested an issue price of $18 a share. That evening, Mutt.Com's financial manager decided to run through some calculations. First, she worked out the net receipts to the company and the existing shareholders assuming that the stock was sold for $18 a share. Next, she looked at the various costs of the IPO and tried to judge how they stacked up against the typical costs for similar IPOS. That brought her up against the question of underpricing. When she had raised the matter with the underwriters that morning, they had dismissed the notion that the initial day's return on an IPO should be considered part of the issue costs. One of the members of the underwriting team had asked: "The underwriters want to see a high return and a high stock price. Would Mutt.Com prefer a low stock price? Would that make the issue less costly?" Mutt.Com's financial manager was not convinced but felt that she should have a good answer. She wondered whether underpricing was only a problem because the existing shareholders were selling part of their holdings. Perhaps the issue price would not matter if they had not planned to sell. Is the initial day's return on the IPO a real cost to the firm? How much would that cost be if the stock is offered at $18 but actually could be sold for $24? How would you respond to the underwriter's questions, “Would Mutt.Com prefer a low stock price? Would that make the issue less costly?"
cautioned about being too greedy on price. They pointed out that indications from investors were not the same as firm orders. Also, they argued, it was much more important to have a successful issue than to have a group of disgruntled shareholders. They therefore suggested an issue price of $18 a share. That evening, Mutt.Com's financial manager decided to run through some calculations. First, she worked out the net receipts to the company and the existing shareholders assuming that the stock was sold for $18 a share. Next, she looked at the various costs of the IPO and tried to judge how they stacked up against the typical costs for similar IPOS. That brought her up against the question of underpricing. When she had raised the matter with the underwriters that morning, they had dismissed the notion that the initial day's return on an IPO should be considered part of the issue costs. One of the members of the underwriting team had asked: "The underwriters want to see a high return and a high stock price. Would Mutt.Com prefer a low stock price? Would that make the issue less costly?" Mutt.Com's financial manager was not convinced but felt that she should have a good answer. She wondered whether underpricing was only a problem because the existing shareholders were selling part of their holdings. Perhaps the issue price would not matter if they had not planned to sell. Is the initial day's return on the IPO a real cost to the firm? How much would that cost be if the stock is offered at $18 but actually could be sold for $24? How would you respond to the underwriter's questions, “Would Mutt.Com prefer a low stock price? Would that make the issue less costly?"
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Hello, please work and answer questions at the bottom of the page and provide steps and explanation. This is all the information that has been provided.
Transcribed Image Text:cautioned about being too greedy on price. They pointed out that indications from investors were not
the same as firm orders. Also, they argued, it was much more important to have a successful issue
than to have a group of disgruntled shareholders. They therefore suggested an issue price of $18 a
share.
That evening, Mutt.Com's financial manager decided to run through some calculations. First, she
worked out the net receipts to the company and the existing shareholders assuming that the stock
was sold for $18 a share. Next, she looked at the various costs of the IPO and tried to judge how they
stacked up against the typical costs for similar IPOS. That brought her up against the question of
underpricing. When she had raised the matter with the underwriters that morning, they had
dismissed the notion that the initial day's return on an IPO should be considered part of the issue
costs. One of the members of the underwriting team had asked: "The underwriters want to see a high
return and a high stock price. Would Mutt.Com prefer a low stock price? Would that make the issue
less costly?" Mutt.Com's financial manager was not convinced but felt that she should have a good
answer. She wondered whether underpricing was only a problem because the existing shareholders
were selling part of their holdings. Perhaps the issue price would not matter if they had not planned
to sell.
Is the initial day's return on the IPO a real cost to the firm? How much would that cost be if the
stock is offered at $18 but actually could be sold for $24? How would you respond to the
underwriter's questions, “Would Mutt.Com prefer a low stock price? Would that make the issue less
costly?"
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education