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Financial management: WCMC IPO

West Coast Manufacturing Company ( WCMC) is executing an initial public offering with the following characteristics. The company will sell 10 million shares at an offer price of $ 25 per share, the underwriter will charge a 7 percent underwriting fee, and the shares are expected to sell for $ 32 per share by the end of the first day's trading. Assuming this IPO is executed as expected, answer the following:

a. Calculate the initial return earned by investors who are allocated shares in the IPO.
b. How much will WCMC receive from this offering?
c. What is the total cost ( underwriting fee and underpricing) of this issue to WCMC?

Solution Preview

a. Initial per-share-return earned by investors who are allocated shares in the IPO = (end of first day's trading price - offer price) = 32 - ...

Solution Summary

Computation in b, makes use of the value computed in c.

$2.19