Quantitative Problems Chapter 11
Quantitative Problems Chapter 11
Ebay, Inc. went public in September of 1998. The following information on shares outstanding was listed in the final prospectus filed with the SEC1.
In the IPO, the Ebay issued 3,500,000 new shares. The initial price to the public was $18.00 per share. The final first-day closing price was $44.88.
1. If the investment bankers retained $1.26 per share as fees, what was the net proceeds to Ebay? What was the market capitalization of new shares of Ebay?
Solution: Net Proceeds to Ebay (18.00 1.26) 3,500,000 $58,590,000.00
Market Cap 44.88 3,500,000 157,080,000
2. Two common statistics in IPOs are underpricing and money left on the table. Underpricing is defined as percentage change between the offering price and the first day closing price. Money left on the table is the difference between the first day closing price and the offering price, multiplied by the number of shares offered. Calculated the underpricing and money left on the table for Ebay. What does this suggest about the efficiency of the IPO process?
Solution: Underpricing ((44.88 18.00)/18.00) 149.33%
MLOT (44.88 18.00) 3,500,000 $94,080,000
3. The shares of Misheak, Inc. are expected to generated the following possible returns over the next 12 months:
Return
Probability
5%
0.10
5%
0.25
10%
0.30
15%
0.25
25%
0.10
If the stock is currently trading at $25/share, what is the expected price in one year. Assume that the stock pays no dividends.
Solution: The expected return over the next 12 months is calculated as:
0.05 0.10 0.05 0.25 0.10 0.30 0.15 0.25 0.25 0.10 0.10
This suggests that the expected price is $25 * (1.10) $27.50
4. Suppose Soft People, Inc. is selling at $19.00 and currently pays an annual dividend of $0.65 per share. Analysts project that the stock will be priced around $23.00 in one year. What is the expected return?
Solution:
5. In September of 2004, Microsoft, Inc. was trading at $27.29 per share.
Ebay, Inc. went public in September of 1998. The following information on shares outstanding was listed in the final prospectus filed with the SEC1.
In the IPO, the Ebay issued 3,500,000 new shares. The initial price to the public was $18.00 per share. The final first-day closing price was $44.88.
1. If the investment bankers retained $1.26 per share as fees, what was the net proceeds to Ebay? What was the market capitalization of new shares of Ebay?
Solution: Net Proceeds to Ebay (18.00 1.26) 3,500,000 $58,590,000.00
Market Cap 44.88 3,500,000 157,080,000
2. Two common statistics in IPOs are underpricing and money left on the table. Underpricing is defined as percentage change between the offering price and the first day closing price. Money left on the table is the difference between the first day closing price and the offering price, multiplied by the number of shares offered. Calculated the underpricing and money left on the table for Ebay. What does this suggest about the efficiency of the IPO process?
Solution: Underpricing ((44.88 18.00)/18.00) 149.33%
MLOT (44.88 18.00) 3,500,000 $94,080,000
3. The shares of Misheak, Inc. are expected to generated the following possible returns over the next 12 months:
Return
Probability
5%
0.10
5%
0.25
10%
0.30
15%
0.25
25%
0.10
If the stock is currently trading at $25/share, what is the expected price in one year. Assume that the stock pays no dividends.
Solution: The expected return over the next 12 months is calculated as:
0.05 0.10 0.05 0.25 0.10 0.30 0.15 0.25 0.25 0.10 0.10
This suggests that the expected price is $25 * (1.10) $27.50
4. Suppose Soft People, Inc. is selling at $19.00 and currently pays an annual dividend of $0.65 per share. Analysts project that the stock will be priced around $23.00 in one year. What is the expected return?
Solution:
5. In September of 2004, Microsoft, Inc. was trading at $27.29 per share.