Betono Inc. wants to go public on the Frankfurt Stock Exchange in February 2022. The firm wants to sell 100 million shares and has asked the investment bank CoolStory Bros. to support its IPO. Given the risk inherent in the company, CoolStory Bros. estimates that the value of one Betono share is equal to $100 with a probability of 80%. However, with a probability of 20%, the value of one share is only $50. This information will only become public in the long run. All discount rates are zero, i.e. values are present values. According to CoolStory Bros., there is a demand for 100 million shares by small, uninformed retail investors if they expect to break even at the offering price. In addition, there could be demand for 70 million shares by institutional investors. However, institutional investors will be informed about the value of the firm and will only apply for 70 million shares if the value per share is $100. Assume that the assumptions of Rock's winner's curse model on IPO underpricing hold. a) What is the maximum offering price at which Betono Inc. could go public? ( 8 points) If you are unable to solve a), you can assume a rationing factor of 2/3 when both informed and uninformed investors apply fol shares and an offering price of 75inb ) and c). Note that this is not necessarily the correct value. b) What price will be established in trading on the stock market after the IPO? What is the percentage increase in the price on the first trading day compared to the offering price (underpricing)? (3 points) c) What are the expected profits per share of informed investors from this transaction? How large are the profits per share of uninformed investors? (7 points) Betono Inc. wants to go public on the Frankfurt Stock Exchange in February 2022. The firm wants to sell 100 million shares and has asked the investment bank CoolStory Bros. to support its IPO. Given the risk inherent in the company, CoolStory Bros. estimates that the value of one Betono share is equal to $100 with a probability of 80%. However, with a probability of 20%, the value of one share is only $50. This information will only become public in the long run. All discount rates are zero, i.e. values are present values. According to CoolStory Bros., there is a demand for 100 million shares by small, uninformed retail investors if they expect to break even at the offering price. In addition, there could be demand for 70 million shares by institutional investors. However, institutional investors will be informed about the value of the firm and will only apply for 70 million shares if the value per share is $100. Assume that the assumptions of Rock's winner's curse model on IPO underpricing hold. a) What is the maximum offering price at which Betono Inc. could go public? ( 8 points) If you are unable to solve a), you can assume a rationing factor of 2/3 when both informed and uninformed investors apply fol shares and an offering price of 75inb ) and c). Note that this is not necessarily the correct value. b) What price will be established in trading on the stock market after the IPO? What is the percentage increase in the price on the first trading day compared to the offering price (underpricing)? (3 points) c) What are the expected profits per share of informed investors from this transaction? How large are the profits per share of uninformed investors? (7 points)
