4. IPO trading

Based on your understanding of the involvement of investment banks in an IPO, complete the following statements.

If the investment bank guarantees the sale of the securities, the issue (sold on a best-effort basis/isunderwritten) The investment bank must pay the issuing firm within(10 or 4)days of the official start of the offering. If more than one investment bank is involved in the IPO, the deal is referred to as(syndicated/ an unsyndicated) stock offering.

After the SEC approves the registration statement for the IPO, the biggest responsibility for the issuing company and the investment bank becomes ensuring that the determined number of securities is sold and the firm is able to raise the intended amount. The IPO teamincluding the investment bankers, senior management team, lawyers, and investor relations teamconducts various activities.

Which of the following statements are true about the activities involved in the IPO process? Check all that apply.

a) If investors are willing to purchase more shares than are available, the IPO is considered to be oversubscribed.

b) The underwriter selects institutional clients and takes the IPO team on a roadshow to make presentations to these clients across different cities.

c) During the roadshow, the IPO team can make forecasts and express their opinions about the projected value of the company after the IPO to lure institutional investors.

d) The investment banker estimates the potential demand for the securities by recording the number of shares that each investor is willing to buy. This is called book-building.

Suppose ReapingTheBenefits Co. (RTB Co.) is one of the largest investment banking firms on Wall Street. VisionStone Corp. hired RTB Co. as the underwriter for its IPO. RTB Co. has set the offering price of the share to $35 per share. The underwriters will charge a 5.6% spread. How many shares must the company sell to net $65 million, ignoring any other expenses?

a)2.36 million shares

b) 1.86 million shares

c) 2.76 million shares

d) 1.97 million shares

Consider the case of LinkedIn Corp.:

In May 2011, LinkedIn issued its IPO, which was priced at $45 a share. On the first day of trading, it hit a high of $122.70. After six months of its IPO, the companys stock was trading at double the price of its IPO.

There are several theories that explain IPO underpricing. One of them is that most investors who get to purchase the IPO at its (oversubscribe price/ offering price) are preferred customers of the investment bank, and they became preferred customers by generating lots of commissions in the investment banks sister brokerage company. Therefore, the IPO is an easy way for the (issuing company/underwriter) to reward its customers for past and future commissions.