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Initial Public Offering Characteristics

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What is an Initial Public Offering (IPO)? How does an IPO allow an organization to grow financially? When is a merger or an acquisition, rather than an IPO, a more appropriate way to grow?

Select a recent IPO and use the Internet to identify the following characteristics of the selected IPO:
a. Initial offering price
b. Price 1 month after offering
c. Current market price
d. Number of shares outstanding at the time of the IPO
e. Number of shares outstanding 1 month after offering (use the stock history to determine this)
f. Current number of shares

2. What are the main elements in calculating cost of capital? How would an increase in debt affect the cost of capital? How would you identify the optimal cost of capital for a organization?

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What is an Initial Public Offering (IPO)?

An Initial Public Offering is when a privately owned company goes public. Prior to most companies going public, the company is small and grows through sales. Privately held companies are not required to disclose significant amounts of information as publicly held companies are. When a company pursues an IPO, it tells the world we are ready to grow and we want you to grow with us through the purchase of our company stock. The IPO sets the number of shares for sale and opening price.

Prior to the IPO, the company generally hires an investment bank to mediate the process. This person is also called the underwriter. The bank compiles the information about the company and files a registration statement report to go public with the Securities Exchange Commission (also known as the SEC) for approval to move forward with the process. The SEC requires that all IPOs have a cooling off period where the parties involved have time to think over the IPO and the parties have time to rescind the decision to move forward or stay the course. During this cooling off period, the SEC does an investigation where they verify all the information stated in the report.

The underwriter and the parties discuss and agree on an opening price and the parties promote the IPO. The promotion period is sometimes called a "dog and pony show" as the parties involved try to sell their product.

How does an IPO allow an organization to grow financially?

An IPO, allows a company to tap a wide pool of stock market investors to provide it with large volumes of capital for future growth. An IPO allows an organization to grow financially by bringing in instant revenue.

Through the sale and purchase of stocks, companies increase revenue. When companies increase revenue, they grow financially. As time goes on, the initial stock often splits making one share two shares. When a person owns 1,000 shares and the stock splits, he or she now has 2,000 shares. When companies sell stock, they also own stock shares. When a split occurs, the company also profits as the amount of stock held has doubled.

When stock prices raise, all the shareholders profit. When the stock declines, all the shareholders feel the pain. Most recently, General Motors stock was valued at just over $2.00 per share. Last year that stock was valued at over $80.00 per share. An IPO can assist in allowing a company to grow ...

Solution Summary

The solution answers the question what is an Initial Publich Offering (IPO) and discusses pricing after one month, current market price, number of shares and the main elements in the calculating the cost of capital.

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IPO, Flotation costs
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1. IPO Underpricing. The James Co/and the Lars Co. have both announced IPOs at $30 per share. One of these is undervalued by $6, and the other is overvalued by $3, but you have no way of knowing which is which. You plan on buying 1,000 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled. If you could get 1,000 shares in James and 1,000 shares in Lars, what would your profit be? What profit do you actually expect? What principle have you illustrated?

2. Calculating Flotation Costs. The Clapper Corporation needs to raise $60 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the offer price is $75 per share and the company's underwriters charge a 7 percent spread, how many shares need to be sold?

5. Calculating Flotation Costs. The Moser Corporation needs to raise $35 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the offer price is $42 per share and the company's underwriters charge a 6 percent spread, how many shares need to be sold?

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