Braxton Enterprises has 5 million shares outstanding and is about to issue 10 million new shares in an IPO. The IPO price has been set at $12 per share, and the underwriting spread is 7%. The IPO is a big success with investors, and the stock rises to $20 on the first day of trading.

1. Who benefited from this price increase? Who lost, and why?

2. How much did Margoles Publishing raise from the IPO?

3. What is the market value of Margoles Publishing after the IPO?

4. Assume that the post-IPO value of Margoles Publishing is its fair market value. Suppose Margoles Publishing could have issued shares directly to investors at their fair market value, in a perfect market with no underwriting spread and no under-pricing. What would the share price have been in this case, if Braxton Enterprises raises the same amount as in part (b)?
5. Comparing part (c) and part (d), what is the total cost to the firms original shareholders due to market imperfections from the IPO?