This is a two-part question. I need help with problem 3, but some of the details are included in problem 1, which will be needed to solve problem 3.

PROBLEM 1

A company is going public at $16 and will use the ticker XYZ. The underwriters will charge a 7 percent spread. The company is issuing 20 million shares, and insiders will continue to hold an additional 40 million shares that will not be part of the !PO. The company will also pay S 1 million of audit fees, S2 million of legal fees, and $500,000 of printing fees. The stock closes the first day at $19. Answer the following questions:

a. At the end of the first day, what is the market capitalization of the company?

b. What are the total costs of the offering? Include underpricing in this calculation.

PROBLEM 3

The company in Problem 1 grants a 15 percent overallotment option to the underwriter. The underwriter issues shares that are backed by the entire overallotment option but has not yet exercised the option.

a. Explain what will happen if the price of the stock increases to $22. Describe the underwriter profits from the overallotment option in your explanation.

b. Explain what will happen if the price of the stock decreases to $11.50. Describe the underwriter profits from the overallotment option in your explanation.