11/23/2018
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
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
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.