EAST COAST YACHTS GOES PUBLIC

Larissa Warren and Dan Ervin have been discussing the future of East Coast Yachts. The company has been experiencing fast

growth, and the future looks like clear sailing. However, the fast growth means that the company's growth can no longer be

funded by internal sources, so Larissa and Dan have decided the time is right to take the company public. To this end, they have

entered into discussions with the investment bank of Crowe & Mallard. The company has a working relationship with Renata

Harper, the underwriter who assisted with the company's previous bond offering. Crowe & Mallard have helped numerous small

companies in the IPO process, so Larissa and Dan feel confident with this choice.

Renata begins by telling Larissa and Dan about the process. Although Crowe & Mallard charged an underwriter fee of $4$ percent

on the bond offering, the underwriter fee is $7$ percent on all initial stock offerings of the size of East Coast Yachts's initial

offering. Renata tells Larissa and Dan that the company can expect to pay about $$1,600,000$ in legal fees and expenses,

$$15,000$ in SEC registration fees, and $$20,000$ in other filing fees. Additionally, to be listed on the NASDAQ, the company must

pay $$100,000.$ There are also transfer agent fees of $$9,500$ and engraving expenses of $$540,000.$ The company should also

expect to pay $$125,000$ for other expenses associated with the IPO.

Finally, Renata tells Larissa and Dan that to file with the SEC, the company must provide three years' worth of audited financial

statements. She is unsure of the costs of the audit. Dan tells Renata that the company provides audited financial statements as

part of its bond indenture, and the company pays $$300,000$ per year for the outside auditor.

At the end of the discussion, Dan asks Renata about the Dutch auction IPO process. What are the differences in the

expenses to East Coast Yachts if it uses a Dutch auction IPO versus a traditional IPO? Should the company go public with a

Dutch auction or use a traditional underwritten offering?

During the discussion of the potential IPO and East Coast Yachts's future, Dan states that he feels the company should raise

$$60$ million. However, Larissa points out that if the company needs more cash soon, a secondary offering close to the IPO

would be potentially problematic. Instead, she suggests that the company should raise $$90$ million in the IPO. How can we

calculate the optimal size of the IPO? What are the advantages and disadvantages of increasing the size of the IPO to $$90$

million?

After deliberation, Larissa and Dan have decided that the company should use a firm commitment offering with Crowe &

Mallard as the lead underwriter. The IPO will be for $$70$ million. Ignoring underpricing, how much will the IPO cost the

company as a percentage of the funds received?

Many of the employees of East Coast Yachts have shares of stock in the company because of an existing employee stock

purchase plan. To sell the stock, the employees can tender their shares to be sold in the IPO at the offering price, or the

employees can retain their stock and sell it in the secondary market after East Coast Yachts goes public $($once the $180-$day

lockup period expires$).$ Larissa asks you to advise the employees about which option is better. What would you suggest to

the employees?