Regina Air Goes Public

Mark and Todd have been discussing the future of Regina Air. The company has been experiencing fast growth, and the two see only clear skies in the company$$s future. However, the fast growth

can no longer be funded by internal sources, so Mark and Todd 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 Zoe Harper, the underwriter who assisted with the company$$s previous bond offering. Crowe & Mallard have assisted

numerous small companies in the IPO process, so Mark and Todd feel confident with this choice.

Zoe begins by telling Mark and Todd about the process. Although Crowe & Mallard charged an underwriter fee of $4\%$ on the bond offering, the underwriter fee is $7\%$ on all initial stock offerings of the size of

Regina Air$$s offering. Zoe tells Mark and Todd that the company can expect to pay about $$1,800,000$ in

legal fees and expenses, $$12,000$ in SEC registration fees, and $$15,000$ in other filing fees.

Additionally, to be listed on the NASDAQ the company must pay $$100,000.$ There are also transfer

agent fees of $$6,500$ and engraving expenses of $$520,000.$ The company should also expect to

pay $$110,000$ for other expenses associated with the IPO.

Finally, Zoe tells Mark and Todd that to file with the SEC, the company must provide three years$$

audited financial statements. She is unsure about the costs of the audit. Mark tells Zoe that the

company provides audited financial statements as part of the bond covenant, and the company

pays $$300,000$ per year for the outside auditor.

$1.$ At the end of the discussion, Mark asks Zoe about the Dutch auction IPO process. What

are the differences in the expenses to Regina Air if it uses a Dutch auction IPO versus a

traditional IPO? Should the company go public through a Dutch auction or use a traditional

underwritten offering?

$2.$ During the discussion of the potential IPO and Regina Air$$s future, Mark states that he feels

the company should raise $$75$ million. However, Zoe points out that if the company needs

more cash in the near future, a secondary offering close to the IPO would be 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?

$3.$ After deliberation, Mark and Todd have decided that the company should use a firm

commitment offering with Crowe & Mallard as the lead underwriter. The IPO will be

for $$75$ million. Ignoring underpricing, how much will the IPO cost the company as a

percentage of the funds received?

$4.$ Many employees of Regina Air 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 Regina Air goes public. Todd asks you to advise the employees

about which option is best. What would you suggest to the employees?