Chapter 15, Problem 2M

Summary Introduction

Case synopsis:

Person MS and Person TS are discussing about the prospect of Company SS. The company seems to grow faster. However, the faster growth of the company can no longer be financed by the company’s internal source. Thus, Person MS and Person TS have decided to go public and they have discussed about this with the Investment Bank CM.

The underwriter of the Company was Person RH who assisted in the previous offerings of the company. The investment bank assisted many companies for their initial public offering thus Person MS and Person TS are confident about the investment bank. The underwriter states the process that is taken by the investment bank.

Characters in the case:

• Person MS
• Person TS
• Person RH
• Investment bank CM
• Company SS

Adequate information:

• Person RH states to Person TS and MS that they must give their 3 years financial statements that are audited, if they need to file with the securities exchange commission
• Person MS states that the company has given the audited financial statements as a part of the bond covenant
• The company makes a payment of $300,000 to the outside auditor
• Person MS feels that the company must raise $75 million
• Person RH points that if the company wants more amount of cash in the future then the secondary offering that is close to the initial public offering will create some issues
• Person RH also makes a suggestion that the company must have to raise $90 million in the initial public offering

To determine: The way to compute the optimal size of the initial public offering. The benefits and drawbacks of increasing the initial public offering size to $90 million.