The investors in Generation.com, a company organized to sell fashions to the current generation of teenagers over the Internet, are interested in harvesting their investments. The investment banker is recommending an IPO that would yield gross proceeds of about $20 million. Based on a lengthy meeting with an investment banker, they believe the post-money valuation of Generation.com would be $120 million based on the issue price. The investment banker would try to set the issue price at about 85 percent of the expected market value per share after the offering and would charge a total fee of $900,000. In addition, Generation.com, itself, would incur out-of-pocket costs of about $400,000.
a. Assuming the IPO is designed to achieve a target aftermarket share price of $20, what will be the offer price of the IPO?
b. How many shares should be outstanding after the IPO?
c. How many shares does the firm need to issue to achieve its target gross proceeds and how many shares will the current shareholders (those before the IPO) have?
d. After all costs, including the implicit cost of underpricing, what is the dollar total cost of the issue, the cost per share issued, and how much will the issuer net per share issued?
e. What is total issue cost as a percentage of gross proceeds, as a percentage of the aftermarket value of issued shares, as a percentage of the implied pre-money value of the issuer’s shares, and as a percentage of the anticipated aftermarket value of the current shareholders’ shares?