CHAPTER 15
S&S AIR 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.
Whether the underpricing is as severe in a Dutch auction as it would be in a traditional underwritten
offer is unknown.
3. The underwriter fee is 7 percent of the amount raised, or:
Underwriter fee = $125,000,000(.07)
Underwriter fee = $8,750,000
The net amount raised is the IPO offer size minus the underwriter fee, or:
Net amount raised = $125,000,000 – 8,750,000
Net amount raised = $116,250,000
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
be sold in the IPO, the employee will lose out on any underpricing. This could be a significant cost.