Assignment 6-3 Worksheet

Larissa Warren and Dan Ervin have been discussing the future of East Coast Yachts. The company has been experiencing fast growth, and the future looks like clear sailing. However, the fast growth means that the companys growth can no longer be funded by internal sources, so Larissa and Dan have decided the time is right to take the company public. To this end, they have entered into discussions with the investment bank of Crowe & Mallard. The company has a working relationship with Renata Harper, the underwriter who assisted with the companys previous bond offering. Crowe & Mallard have helped numerous small companies in the IPO process, so Larissa and Dan feel confident with this choice.

Renata begins by telling Larissa and Dan about the process. Although Crowe & Mallard charged an underwriter fee of 4 percent on the bond offering, the underwriter fee is 7 percent on all initial stock offerings of the size of East Coast Yachts initial offering. Renata tells Larissa and Dan that the company can expect to pay about $1,500,000 in legal fees and expenses, $15,000 in SEC registration fees, and $20,000 in other filing fees. Additionally, to be listed on the NASDAQ, the company must pay $100,000. There are also transfer agent fees of $8,500 and engraving expenses of $525,000. The company should also expect to pay $75,000 for other expenses associated with the IPO.

Finally, Renata tells Larissa and Dan that to file with the SEC, the company must provide three years worth of audited financial statements. She is unsure of the costs of the audit. Dan tells Renata that the company pays $300,000 per year for the outside auditor.

• Whattypeofunderwritingwouldyourecommend?Explain
• The company's estimated immediate cash needs are $60 million but an IPO for $90 million would cover any shortfall in this estimation. What are the advantages and disadvantages of increasing the size of the IPO to $90 million?
• If you were an employee of East Coast Yachts and owned shares as the result of an existing employee stock purchase plan what would be your considerations in deciding whether to tender your shares at the IPO offering price or retaining for eventual sale in the secondary market.