A U.S. firm wants to raise $15 million by selling 1 million shares at a net price of $15. We know that some say that firms "leave money on the table" because of the phenomonon of underpricing.
Using the average amount of underpricing in U.S. IPOs, how many fewer shares could it sell to raise these funds if the firm received a net price per share equal to the value of the shares at the end of the first day's trading?
How many less shares could it sell if the IPO was occurring in Germany?
How many less shares could it sell if the IPO was occurring in Korea?
How many less shares could it sell if the IPO was occurring in Canada?
To answer this question, we need to understand how underpricing affects the number of shares a firm needs to sell to raise the desired funds. Underpricing refers to the situation where the issue price of a stock in an initial public offering (IPO) is set lower than its market value after the first day of trading. This gap between the issue price and market value can result in the firm "leaving money on the table" because it could have raised more funds by selling fewer shares.
To calculate the number of fewer shares the firm could sell to raise the desired funds, we need to consider the average underpricing in U.S. IPOs and the market value of the shares at the end of the first day's trading.
1. U.S. IPO Scenario:
If we assume that the average underpricing in U.S. IPOs is 10%, it means that the market value of the shares at the end of the first day will be 10% higher than the issue price. In this case, the firm would need to sell fewer shares to raise the desired $15 million.
Let's calculate the net price per share in this scenario:
- Net price per share = Issue price per share * (1 + underpricing percentage)
- Net price per share = $15 * (1 + 0.10) = $16.50
To calculate the number of fewer shares, we divide the desired funds by the net price per share:
- Fewer shares = Desired funds / Net price per share
- Fewer shares = $15 million / $16.50 = 909,090.91 shares
Therefore, in the U.S. IPO scenario with an average underpricing of 10%, the firm could sell approximately 909,090 fewer shares to raise $15 million if it received a net price per share equal to the value of the shares at the end of the first day's trading.
2. Germany IPO Scenario:
To determine the number of fewer shares in a different country like Germany, we would need information about the average underpricing in German IPOs. Without that information, we cannot provide an accurate answer. Underpricing patterns can vary across countries and markets.
3. Korea IPO Scenario:
Similarly, without the average underpricing information specific to Korea, we cannot calculate the number of fewer shares for this scenario.
4. Canada IPO Scenario:
As with the previous scenarios, we need information about the average underpricing in Canadian IPOs to determine the number of fewer shares in this scenario.
To answer the remaining questions, we would need data specific to Germany, Korea, and Canada, including the average underpricing in IPOs in those countries. Without such data, we cannot provide accurate calculations.