Sarah recently began work as a junior investment specialist at the hedge fund, Zeta Partners. Besides supporting the work of senior members of the firm, Sarah was eager to make a positive impression by coming up with profitable investment ideas of her own. She knew that any trades that she proposed had to conform to Zeta's policy of remaining "market neutral." That is, the success or failure of any investment idea should not depend on whether the broad direction of the overall stock market was up or down. She thought that she had found a promising idea in a recent public offering of TORO.

TORO was formerly a wholly owned subsidiary of MAVERICK Software Inc., a highly profitable firm that had been in the business of developing cybersecurity software for many years. Some years ago, MAVERICK began developing expertise in blockchain technology, starting with a small team focused on mining. As the team achieved early success and the price of skyrocketed to more than $10,000 in late 2017, MAVERICK's senior managers decided to spinoff the growing subsidiary into an independent public company.

In the spinoff transaction, MAVERICK would create shares of common stock for the subsidiary which would trade on the Nasdaq market under the ticker symbol TORO. There would be 13.72 million shares of stock outstanding, but in the initial IPO, MAVERICK would sell only 2.72 million shares to the public, retaining the rest until the obtaining IRS approval to complete the spinoff in a tax-free transaction. That approval could take several months, but once it came, MAVERICK would distribute the remaining 11 million TORO shares that it owned on a pro rata basis to holders of MAVERICK common stock. There were 15.36 million common shares of MAVERICK outstanding.

Demand for the TORO IPO was brisk, to say the least. TORO common shares were sold to IPO investors at $16 per share. Given the initial sale of 2.72 million shares, TORO raised $40.52 million, net of a $3 million fee paid to the IPO underwriters. On its first day as a public company, TORO's stock closed at $37.25. The same day, MAVERICK stock closed at $23.50.

Below are balance sheets for TORO and MAVERICK as they appeared just before the TORO IPO.

MAVERICK Software Balance Sheet ($ 000s)
Cash	23,000	Payables	114,000
Receivables	60,000	Short-term debt	4,500
Inventory	67,500	Other current liab.	23,000
Other current assets	19,000	Long-term debt	300
PP&E	22,500	Stockholder's equity	71,200
Long-term assets	21,000
Total assets	213,000	Total liab. plus equity	213,000

Balance Sheet ($ 000s)
Cash	50	Payables	7,200
Receivables	750	Short-term debt	0
Inventory	7,000	Other current liab.	1,300
Other current assets	15	Long-term debt	5,800
PP&E	450	Stockholder's equity	-4,535
Long-term assets	1,500
Total assets	9,765	Total liab. plus equity	9,765

Question 1

Begin by making some adjustments to these balance sheets. To the extent possible, we want to express the value of assets, liabilities, and equity in market value terms. As a first approximation, assume that for both companies the book value of current assets, PP&E, and other long-term assets is the same as the market value. Make the same assumption for payables, other liabilities, and long-term debt.

MAVERICK Software Balance Sheet ($ 000s)
Cash	23,000	Payables	114,000
Receivables	60,000	Short-term debt	4,500
Inventory	67,500	Other current liab.	23,000
Other current assets	19,000	Long-term debt	300
PP&E	22,500	Stockholder's equity	71,200
Long-term assets	21,000
TORO stock held	???
Total assets		Total liab. plus equity

For MAVERICK, recognize that after the IPO it owns a new asset with a market value that you can calculate directly by multiplying the current TORO share price after the IPO times the number of TORO shares that MAVERICK still owns after the IPO. Use the closing price to determine this amount. Include this new asset on the left side of MAVERICK's balance sheet.

Question 2

Next, for both companies change the book value of stockholder's equity to the market value of stockholder's equity. Given the closing prices on the IPO day and the number of shares outstanding for each company, you can determine the market value of equity. Use those numbers instead of the stockholder's equity figure on each balance sheet. What is the market value of equity for MAVERICK?

Question 3

What is the market value of equity for TORO, using the closing prices on the IPO day?

Question 4

Assume TORO retains all the proceeds from the stock sale, less associated fees. What would the new balance of TORO's cash account be after the IPO?