DRK, incorporated, has just sold 100,000 shares in an initial public offering. The underwriter’s explicit fees were $60,000. The offering price for the shares was $40, but immediately upon issue, the share price jumped to $44. What is the total cost to DRK of the equity issue?
DRK, incorporated, has just sold 100,000 shares in an initial public offering. The underwriter’s explicit fees were $60,000. The offering price for the shares was $40, but immediately upon issue, the share price jumped to $44. What is the total cost to DRK of the equity issue?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
DRK, incorporated, has just sold 100,000 shares in an initial public offering. The underwriter’s explicit fees were $60,000. The offering price for the shares was $40, but immediately upon issue, the share price jumped to $44. What is the total cost to DRK of the equity issue?
![### Exercise 1: Initial Public Offering Costs
**Scenario:**
DRK, Incorporated, has just sold 100,000 shares in an initial public offering (IPO). The underwriter's explicit fees were $60,000. The offering price for the shares was $40, but immediately upon issue, the share price jumped to $44.
**Required:**
a. What is the total cost to DRK of the equity issue?
**Explanation:**
To determine the total cost to DRK of the equity issue, you need to consider both the underwriting fees and the loss due to the immediate price jump of the shares after the initial pricing.
**Calculation Steps:**
1. **Underwriting Fees:** $60,000.
2. **Loss due to Price Jump:**
- Initial Offering Price per Share: $40.
- Market Price immediately after Issue: $44.
- Price Increase: $44 - $40 = $4.
- Total Loss: $4 * 100,000 shares = $400,000.
**Total Cost:**
\[ \text{Underwriting Fees} + \text{Total Loss} \]
\[ $60,000 + $400,000 = $460,000 \]
Thus, the total cost to DRK of the equity issue is $460,000.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F57bb2ad7-552f-4223-b9c8-67ecf632dee6%2F22efc390-a42d-4dbd-9322-563687dcfb56%2F46ic8f_processed.jpeg&w=3840&q=75)
Transcribed Image Text:### Exercise 1: Initial Public Offering Costs
**Scenario:**
DRK, Incorporated, has just sold 100,000 shares in an initial public offering (IPO). The underwriter's explicit fees were $60,000. The offering price for the shares was $40, but immediately upon issue, the share price jumped to $44.
**Required:**
a. What is the total cost to DRK of the equity issue?
**Explanation:**
To determine the total cost to DRK of the equity issue, you need to consider both the underwriting fees and the loss due to the immediate price jump of the shares after the initial pricing.
**Calculation Steps:**
1. **Underwriting Fees:** $60,000.
2. **Loss due to Price Jump:**
- Initial Offering Price per Share: $40.
- Market Price immediately after Issue: $44.
- Price Increase: $44 - $40 = $4.
- Total Loss: $4 * 100,000 shares = $400,000.
**Total Cost:**
\[ \text{Underwriting Fees} + \text{Total Loss} \]
\[ $60,000 + $400,000 = $460,000 \]
Thus, the total cost to DRK of the equity issue is $460,000.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education