Sub: Finance Topic: Cost of Capital
The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not forsubmitting the same in lieu of their academic submissions for grades.
a)Initial return earned by investors who are allocated shares in the IPO.
Investment made by the investor in one share = Purchase price = $25Selling price expected at the end of first-
day’s trading = $32
So profit per share = $ 7Thus return for investor = 7/25 =
b)How much will WCMC receive from this offering?
Total No of shares issued = 10 millionPrice per share collected = $25So total amount collected from investors = 25*10 million = $ 250 million.Under-writing fee charged by underwriter = 7%So underwriting fee paid from collection = 7%*250million = $17.50 million.The net proceeds =$ 250m
$ 17.50 m = $ 232.50 million.So, Net amount that will be received by WCMC =
$ 232.50 million
c)What is the total cost (underwriting fee and under pricing) of this issue to WCMC?
Total cost of the issue:Underwriting fee = $17.50 millionUnder-pricing value = profits earned by investors at end of I day= $7*10 million = $70 million.