East Coast Yachts - Assignment Example

In the Dutch auction, though companies need an investment bank for underwriting the IPO but the costs, in comparison to traditional route, are lower. Also, investors can enter only one bid and not multiple bids at different quantities. In this kind of bid process, the allotment is made "to the bidders from the highest bids down, until all of the allotted share are assigned" (Investopedia, 2014). In the traditional method, usually the institutional and large investors are involved while the Dutch auction process facilitates small investors to participate in the bid.

Advantage with the Dutch auction is that the process can fetch price of the share close to its market value at lower expense. Hence East Coast Yachts needs to go for a Dutch auction to go public.Answer 2. The optimal size of the IPO can be calculated by assessing true needs of funds for at least 2 years of future operations after ongoing expansion. Raising $100 million when the company currently needs only $75 million means ECY will have advantage of increased liquidity or cushioning to face liquidity crunch that may arise due to unforeseen circumstances in the business.

However, in this process the company’s equity base will increase by 33% putting unnecessary pressure on the company’s earnings per share. This is disadvantageous because lower earnings per share will fetch lower market price assuming same P/E ratio for ECY. After all, efficient financial management is a critical need for any company to enhancing operational performance hence cushioning of 5-10% is fine while raising money in public but raising $100 million (33% higher than current requirement) is certainly detrimental to the long-term financial health of the company (Dutch Auction IPO vs.

Traditional Book Building, 2013).Answer 3. East Coast Yachts will incur certain expenses in order to garner funds from the said IPO. Likely expenses can be listed as per the following. Legal fees and expenses $1,800,000SEC Registration fees $15,000Other filing fees $20,000Nasdaq listing fees $100,000Transfer agent fees $8,500Engraving expenses $525,000Other expenses $75,000Total expenses $2,543,500It is pertinent to note that the company already provides audited financial statements to the SEC as part of its bond indenture incurring expenses of $325,000, however, that needs not to be counted as necessary expenses for this IPO.

Crowe & Mallards will charge 7% as underwriting commission to the total issue of $85 million that will take away $ 5.95 million leaving $79.05 from the fund collected. While deducting above mentioned expenses of $2,543,500 the company will have effective fund raising of $79- $2.5435 = $76.4565 million for their use. In this entire process, total costs or expenses of the company are ($5.95+ $2.5435) = $8.4935 million. Based on the expenses incurred, the IPO cost of the company as a percentage of the funds received can be given as,= $8.

4935/$85 or 9.99%.ReferencesDutch Auction IPO vs. Traditional Book Building (2013). Cornell University. Retrieved October 1, 2014 from http://blogs.cornell.edu/info4220/2013/03/29/dutch-auction-ipo-vs-traditional-book-building/Investopedia (2014). Dutch Auction. Retrieved October 1, 2014 fromhttp://www.investopedia.com/terms/d/dutchauction.asp