Case Scenario: Ebay inc. went public in September of 1998. The following information on shares outstanding was listed in the final prospectus filed with SEC. In the IPO, Ebay issued 3,500,000 new shares. The intial price to the public was $18.00 per share. The final first-day closing price was $44.88.
Question 1. Two common statistics in IPOs are underpricing and money left on the table. Underpricing is defined as percentage change between the offering price and the first day closing price. Money left on the table is the difference between the first day closing price and the offering price, multiplied by the number of shares offered. Calculate the underpricing and money left on the table for Ebay. What does this suggest about the efficiency of the IPO process?
Question 2: LaserAce is selling at $22.00 per share. The most recent annual dividend paid was $0.80. Using the Gordon Growth Model, if the market requires a return of 11%, what is the expected dividend growth rate for LaserAce?
Question 3: Huskie Motors just paid an annual dividend of $1.00 per share. Management has promised shareholders to increase dividends at a constant rate of 5%. If the required return is 12%, what is the current price per share?
Question 4: The projected earnings per share for Risky Ventures, Inc. is $3.50. The average PE ratio for the industry composed of Risky ventures closet competitor is 21. After careful analysis, you decide that Risky ventures is a little more risky than average, so you decide a PE ratio of 23 better reflects the market's perception of the firm. Estimate the current price of the firm's stock.