Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
C-1 CASE SOLUTIONS
CHAPTER 20
EAST COAST YACHTS GOES PUBLIC
1. The main difference in the costs is the reduced possibility of underpricing in a Dutch auction. As to
which is better, we don’t actually know. In theory, the Dutch auction should be better since it should
2. There is no way to calculate the optimum size of the IPO, so whether Dan is correct or Larissa is
correct will only be told in time. The disadvantages of raising the extra cash in the IPO include the
agency costs of excess cash. The extra cash may encourage management to act carelessly. The extra
3. The underwriter fee is 7 percent of the amount raised, or:
Since the company must currently provide audited financial statements due to the bond covenants,
the audit costs are not incremental costs and should not be included in the calculation of the fees. So,
the sum of the other fees is:
The net amount raised is the IPO offer size minus the underwriter fee, or:
So, the fees as a percentage of the net amount to the company are:
4. Because of legal repercussions, you should not provide specific advice on which option the
employees should choose. There are advantages and disadvantages to each. If the employee tenders
C-2 CASE SOLUTIONS
the stock to be sold in the IPO, the employee will lose out on any underpricing. This could be a
significant cost. However, if the employee retains the stock, he/she must hold the stock for the
lockup period, typically 180 days. Additionally, during the lockup period, the employee is legally
