Your firm has 10 million shares outstanding, and you are about to issue 5 million

new shares in an IPO. The IPO price has been set at $20 per share, and the underwriting

spread is 7%. The IPO is a big success with investors, and the share price rises to $50 on

the first day of trading.

a. How much did your firm raise from the IPO?

b. What is the market value of the firm after the IPO?

c. Assume that the post-IPO value of your firm is its fair market value. Suppose your

firm could have issued shares directly to investors at their fair market value, in a perfect

market with no underwriting spread and no underpricing. What would the share price

have been in this case, if you raise the same amount as in part (a)?

d. Comparing part (b) and part (c), what is the total cost to the firm's original investors

due to market imperfections from the IPO?