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CHAPTER 19 C-1
CHAPTER 19
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
eliminate underpricing. However, as Google shows, underpricing can still exist in a Dutch auction.
offer is unknown.
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
as a percentage of funds raised, although this may not be a large advantage.
3. The underwriter fee is 7 percent of the amount raised, or:
Underwriter fee = $70,000,000(.07)
Underwriter fee = $4,900,000
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:
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 the stock to
CHAPTER 19 C-2
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 prohibited from hedging the
