Problems (4) Chapter 15 - Case Study Example

24th March Finance and Accounting Question In the scenario that S&S Air adopts the traditionalIPO, the company will incur a number of expenses including the 7% fees charged by the underwriter, $1,200,000 legal fees and expenses, SEC registration fees amounting to $12,000, $100,000 for listing on the NASDAQ, $15,000 filing fees, engraving expenses amounting to $450,000, $6,500 transfer agent fees and additional $75,000. In addition, the company must pay 300,000 to the external auditor in order to comply with the SEC audited financial report requirement.

However, in the Dutch auction, the company would not need an underwriter to price its shares since it only need to divide its shares pro rata and invite bidders to place their bids. Additionally, through Dutch auction IPO, there is no audited financial report requirement thus the external auditors fees are avoided. Based on the low costs of holding the IPO using Dutch auction as compared to traditional IPO, S&S Air should go public through Dutch auction IPO.Question 2In calculating the optimal size of IPO, the company should compare its financial and operational performance with that of few public-owned firms within the Air industry.

The firm in collaboration with the underwriter should base their prices after analyzing the market price ratios, making the appropriate adjustments based on the companies-specific differences (Benninga and Sarig 411). In this way, they determine the maximum and minimum share price. This is followed by gathering recent IPO market information and lastly setting a final offer price. The major advantage of increasing the size of S&S Air IPO to $80 is that the company will raise more funds that are needed to support its current growth and future expansion.

However, the major disadvantage is that it is costly for a firm leading to low profitability.Question 3S&S Air underwriter fees amount to $4,200,000 calculated as (.07*60,000,000). Adding the to all the other IPO direct costs, the total costs amounts to $6,358,500. As a percentage of the funds received, the IPO will cost the company $6,358,500/60,000,000*100=10.60% (Benninga and Sarig 411).Question 4During the initial public offering, the company through the corroboration with its investment bank has the duty of setting the price of its shares.

In this regard, the employees should render their shares to be sold during the IPO since in the secondary offering, the shares prices will significantly be determined by the market forces. Additionally, the demand for shares in the secondary market will be low since most of the external investors will be watching the movements of the share prices in the stock exchange. This implies that in the secondary investment, the possibility of getting low returns is high.Works CitedBenninga, SZ and Sarig, OH.

Corporate Finance: A Valuation Approach. New York: McGraw-Hill, 1997. Print