A B C D E F

1 Tool Kit Chapter 18

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3 Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks
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5
6 18-3 The Process of Going Public: An Initial Public Offering
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8 18-3e Setting the Offer Price
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10 Setting the Offer Price if the Number of New Shares is Known
11 Inputs for Facebook's IPO
12 Estimated value of the firm's equity before the IPO = $75.00
13 Number of shares before the IPO = 1.96
14 Number of new shares sold in the IPO = 0.18
15 Number of shares after the IPO = 2.14
16 Percentage flotation cost = 7%
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18
19 Offer price = (VPre-IPO)/[(F nNew) + nExisting]
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21 Offer price = $38.02
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23
24 Setting the Offer Price if the Target Net Proceeds are Known
25 Inputs for example
26 Estimated Pre-IPO value = $50.00
27 Number of shares before the IPO = 2.00
28 Percentage flotation cost = 7%
29 Required net proceeds = $9.30
30
31 Intermediate calcuations:
32 Gross proceeds = (Required net proceeds)/(1-F) = $10
33 Gross proceeds not in actutal dollars, not millions = $10,000,000
34 % of shares required by new investors:
35 (Net proceeds) / {(1-F)[(Net proceeds) + Vpre-IPO ] } = 16.86341%
36 nNew = [(% required)(nExisting)]/(1 - % required) = 405,680
37
38 POffer = (Gross proceeds)/nNew = $24.65
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40
41 18-3g The Costs of Going Public
42
43 Underwriting Fees
44 Inputs
45 Offer price = $20.00
46 Underwriter spread = 7%
47 Direct costs as a percentage of the gross proceeds = 4.5%
48 Number of shares issued = 5
49 Percentage first-day return = 15%
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51 Intermediate calcuations:
52 Underwriter fee per share = $1.40
53 Proceed per share to company = $18.60
54 Gross proceeds = $100.00
55 Net proceeds = $93.00
56
57
58 Total underwriting fee = $7.00
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60 Total other direct costs = $4.50
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62 First-day ending price = $23.00
63 Money left on the table per share = $3.00
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65 Total money left on the table = $15.00
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67
68 Total direct costs and money left on the table = $26.50
 G H I
1 11/23/2018
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Seasoned Offerings, 3 and Investment Banks
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10
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12 billion
13 billion
14 billion
15 billion
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17
18
(VPre-IPO)/[(F n19
New
) + nExisting]
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22
23
24
25
26 million
27 million
28
29 million
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31
32 million
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34
35
36
37
38
39
40
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44
45
46
47
48 million
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50
 G H I
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52
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55 million
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57
58 million
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60 million
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63
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65 million
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67
68 million
 A B C D E F G H I
4 This worksheet contains a model to analyze a rights offering.
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6 Model for Evaluating A Rights Offering
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8
Southeast Airlines currently has 1 million shares of stock selling for $100 per share. It plans to raise $10 million in new equity
9 through a rights offering that will allow holders of the rights to purchase the new share of stock at $80 per share. Each
10 stockholder will get 1 right for each share of stock that they own.
11
12 Funds to be raised= $10,000,000
13 Subscription price= $80
14 Number of old shares= 1,000,000
15 Old price per share= $100
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17
18 Number of new shares= Funds to be raised ÷ Subscription price
19 Number of new shares= 125,000
20
21 Number of rights needed to buy a share of new stock = Old shares / New shares
22 Number of rights needed to buy a share of new stock = 8
23
24 New total market value of equity = Old total market value + New funds raised
25 New total market value of equity = $110,000,000
26 New total number of shares = 1,125,000
27 New price per share = $97.78
28
29
30 Value of One Right
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32 Value of one right = Market value of stock, rights on - Subscription price
33 Number of rights required to buy one share of stock + 1
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35 Value of one right = 20 = $2.22
36 9
37 Alternatively:
38 Value of one right = Market value of stock, ex rights - Subscription price
39 Number of rights required to buy one share of stock
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41 Value of one right = 18 = $2.22
42 8
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44 Effects on the Wealth of Stockholders
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46 Assume a stockholder has 8 shares of stock.
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48 Wealth before rights announcement = Number of shares x Price per share
49 Wealth before rights announcement = 8 x $100 = $800

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50
51 Wealth if stockholder exercises the right
52
53 Cost to purchase the right = $80.00
54 Number of shares after exercising the right = 9
55 Price per share after rights offering = $97.78
56 Wealth after exercising the right = Number of shares x Price per share
57 Wealth after exercising the right = $880.00
58 Change in wealth = Ending wealth - starting wealth - cost to exercise right
59 Change in wealth = $880.00 - $800.00 - $80.00
60 Change in wealth = $0.00
61
62
63 Wealth if stockholder sells the right
64
65 Value of right = $2.22
66 Proceeds from selling the rights = Number of rights x Value of right
67 Proceeds from selling the rights = 8x $2.22 = $17.78
68 Number of shares after selling the right = 8
69 Price per share after rights offering = $97.78
70 Wealth after selling the right = Number of shares x Price per share
71 Wealth after selling the right = $782.22
72 Change in wealth = Ending wealth - starting wealth + proceeds from selling the right
73 Change in wealth = $782.22 - $800.00 + $17.78
74 Change in wealth = ($0.00)

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SECTION 18-3
SOLUTIONS TO SELF-TEST

A privately held company has an estimated value of equity equal to $100 million. The founders own 10 million
shares. If they sell 1 million shares with no underwriting costs, how much should the per share offer price be?
($10.00) If instead the underwriting spread is 7%, what should the offer price be? ($9.93)

Estimated value of the firm's equity before the IPO = $100.00 million
Number of shares before the IPO = 10.00 million
Number of new shares sold in the IPO = 1.00 million

Percentage spread = 0%
Offer price = (VPre-IPO)/[(F nNew) + nExisting]
Offer price = $10.00

Percentage spread = 7%

Offer price = $9.93

A company is planning an IPO. Its underwriters have said the stock will sell at $50 per share. The underwriters
will charge a 7% spread. How many shares must the company sell to net $93 million, ignoring any other
expenses?

Price = $50
Spread = 7%
Target proceeds = $93 million

Net price = $46.50

Required number of shares = $2.0000 million