Case 2: Initial Public Offerings

Lightning Corp. has recently completed its Initial Public Offering. The stock was offered at a price of $14 per

share. On the first day of trading, the stock closed at $19 per share.

1. What was the initial return on Lightning Corp. stocks?

2. Who benefited from this underpricing?

3. Who lost from the underpricing, and why?

Case 3: Seasoned Equity Offering

On May 15th, Garbage Management Inc. offered to the market 8 million shares in a Seasoned Equity Offering at a price of $40. The share price before the offer was $ 46 per share, and the number of shares outstanding was 14 million. After the announcement of the offer, the price declined at $42.50 per share. Of the 8 million shares sold, 5 million shares were new (primary) shares being issued by the company, while the remaining 3 million shares were being sold by venture capital investors who supported the growth of the company. Assume that the underwriter charges 5% of the gross proceeds as an underwriting fee (which is then shared proportionately between primary and secondary shares).

1. Why, in your opinion, did the share price decline when the offer was announced to the market?

2. How much money did Garbage Management Inc raise with the offer?

3. How much money did the venture capitalists receive for selling their shares?

4. What is the total change in value between before and after the offering, considering both the costs of

   the offering and the price decline?