16. Underpricing (S14.2) Fishwick Enterprises has 200,000 shares outstanding, half of which are owned by Jennifer Fishwick and half by her cousin. The two cousins have decided to sell 100,000 shares in an IPO. Half of these shares would be issued by the company to raise new cash, and half would be shares that are currently held by Jennifer Fishwick. Suppose that the shares are sold at an issue price of $50 but rise to $80 by the end of the first day’s trading.

Suppose also that investors would have been prepared to buy the issue at $80.

a. What percentage of the company will Jennifer own after the issue?

b. What will her holding be worth at the end of the first day’s trading?

c. Suppose the issue had been priced at $80. How many shares would the company have needed to sell to raise the same gross proceeds from the IPO?

d. What in this case would be Jennifer’s wealth (cash plus the value of her remaining holding)?

Assume Jennifer also needs to sell her shares to raise the same gross proceeds from the IPO.

e. What is the cost of underpricing to Jennifer in dollars?