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12/10/2012
Situation
For answers to the individual discussion questions, see the Chapter 18 PowerPoint Show.
Setting the Offer Price and Number of New Shares to Be Sold
Pre-IPO value of equity = $63 million
Target net proceeds = $18.60 million
Total underwriting spread = $1.400 million
Chapter 18. Mini Case
Randy’s, a family-owned restaurant chain operating in Alabama, has grown to the point that
expansion throughout the entire Southeast is feasible. The proposed expansion would require the
firm to raise about $18.3 million in new capital. Because Randy’s currently has a debt ratio of 50%
and because family members already have all their personal wealth invested in the company, the
family would like to sell common stock to the public to raise the $18.3 million. However, the family
wants to retain voting control. You have been asked to brief family members on the issues
involved by answering the following questions.
i. The estimated pre-IPO value of equity in the company is about 63 million and there are 4 million
shares of existing shares of stock held by family members. The investment bank will charge a 7%
spread, which is the difference between the price the new investor pays and the proceeds to the
company. To net $18.3 million, what is the value of stock that must be sold? What is the total post-
IPO value of equity? What percentage of this equity will the new investors require? How many
shares will the new investors require? What is the estimated offer price per share?
A shorter way is to recognize that all the flotation costs are born by existing stockholders, so you
can divided the pre-IPO value, less the total flotation costs, by the number of exisiting shares. The
number of new shares that must be sold is equal to the gross proceeds divided by the stock
price.
Proceeds from issuing stock
A firm issues 7 million shares at $10, what are the net proceeds if the spread is 7%?
Gross Proceeds = 7,000,000 x10
Gross Proceeds = 70,000,000
