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

If the investment bank does not guarantee the sale of the securities, the investment bank is working ona best efforts deal. Once the investment bank sells the securities, investors must pay the bank within10 days. If the IPO involves a large amount, investment banks forma selling group to distribute and sell the securities.

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.

Issuing firms mostly allow underpricing of their IPO because the company wants to create excitement and have a successful IPO, which would help the company in future offerings.

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

During the roadshow, the IPO team can divulge additional information to institutional investors that is not given in the registration statement to lure the institutional investors.

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 $20 per share. The underwriters will charge a 5.8% spread. How many shares must the company sell to net $83 million, ignoring any other expenses?

4.41 million shares

4.15 million shares

5.29 million shares

6.17 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 the underwriter needs an honest indication of interest when book-building prior to the offering, and underpricing is a possible way to secure this information from the institutional investors.