MINICASE Mutt.Com was founded in 2015 by two graduates of the University than to have a group of disgruntled shareholders. They therefore of Wisconsin with help from Georgina Sloberg, who had built up suggested an issue price of $18 a share. an enviable reputation for backing new start-up businesses. Mutt That evening, Mutt.Com's financial manager decided to run Com's user-friendly system was designed to find buyers for through some calculations. First, she worked out the net receipts unwanted pets. Within 3 years, the company was generating reve- to the company and the existing shareholders assuming that the nues of $3.4 million a year and, despite racking up sizable losses, stock was sold for $18 a share. Next, she looked at the various was regarded by investors as one of the hottest new e-commerce costs of the IPO and tried to judge how they stacked up against businesses. Therefore, the news that the company was preparing to the typical costs for similar IPOs. That brought her up against the go public generated considerable excitement. question of underpricing. When she had raised the matter with The company's entire equity capital of 1.5 million shares was the underwriters that morning, they had dismissed the notion that owned by the two founders and Ms. Sloberg. The initial public the initial day's return on an IPO should be considered part of the offering involved the sale of 500,000 shares by the three existing issue costs. One of the members of the underwriting team had shareholders, together with the sale of a further 750,000 shares by asked: "The underwriters want to see a high return and a high the company in order to provide funds for expansion. stock price. Would Mutt.Com prefer a low stock price? Would The company estimated that the issue would involve legal fees, that make the issue less costly?" Mutt.Com's financial manager auditing, printing, and other expenses of $1.3 million, which would was not convinced but felt that she should have a good answer. be shared proportionately between the selling shareholders and the She wondered whether underpricing was only a problem because company. In addition, the company agreed to pay the underwriters the existing shareholders were selling part of their holdings. a spread of $1.25 per share (this cost also would be shared). Perhaps the issue price would not matter if they had not planned The roadshow had confirmed the high level of interest in the to sell. issue, and indications from investors suggested that the entire issue Is the initial day's return on the IPO a real cost to the firm? How could be sold at a price of $24 a share. The underwriters, however, much would that cost be if the stock is offered at $18 but actually cautioned about being too greedy on price. They pointed out that could be sold for $24? How would you respond to the underwriter's indications from investors were not the same as firm orders. Also, questions, "Would Mutt. Com prefer a low stock price? Would that they argued, it was much more important to have a successful issue make the issue less costly?"