Currently, it is 2022 and Luther Corporation is planning to take the firm public through an IPO. Luther has no debt and 40 million shares outstanding. It is about to issue 5 million new shares for sale in the IPO. The underwriter handling Luthers initial offering charges 7% of the gross proceeds as an underwriting fee. Luther forecasts that the 2023 cash flow from operations will be $450 million.

(a)The underwriter advises Luther that the prices of other recent IPOs have been set such that the average cash flow multiple based on the 2023 forecasted cash flow from operations is 2. Assuming Luther is set at a price that implies a similar multiple, what will Luthers IPO price per share be? How much will Luther raise from the IPO?

Assume that the IPO is successful and that Luther shares sell for $35 each immediately after the offering:

(b) Who benefits from this price increase? Who lost, and why?

(c) What is the market value of Luther after IPO?

(d) Assume that the post-IPO value of Luther is its fair market value. Suppose Luther could have issued shares directly to investors at their fair market value, in a perfect market with no underwriting spread and no underpricing. What would the share price have been in this case, if Luther raises the same amount as in part (a)?