Glazer Drug Co.
Case 23
Initial Public Offering
Purpose: The case deals with computing the cost of going public, the dilutive effects of an IPO, and the
return that must be earned on the net proceeds in order to avoid dilution. The case involves the generic
drug industry, which has an ever-increasing visibility. Of particular interest is the fact that the stock
skyrocketed in value after the IPO and the effect this has on a major selling stockholder who was one of
the founders of the company. It is up to the students to identify his potential displeasure with the
managing investment banker.
Relation to Text: This case should follow Chapter 15.
Complexity: The case is moderately complex and should require 1 hour.
Solutions
Earnings per share after stock issue
3.
$ 36.68
Net price to the corporation
x 10 million
New shares
$366,800,000
Proceeds before out-of-pocket loses
– $ 2,000,000
Out-of-pocket costs
$364,800,000
Net proceeds
4. To maintain EPS of $1.50, total earnings must be $165 million after the issue. The
calculations follow:
= $1.50
(original) EPS
50.1$
6. Mr. Glazer is likely to be quite unhappy! It appears the investment banker priced the stock at
way too low a value in the initial public offering. Mr. Glazer sold 85 percent of his shares at