# CMA Study Group

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## IPO Cost

• #### 1.  IPO Cost

Posted 11-30-2019 03:06 AM
Stump Inc. a technology firm in Prairie View, Texas, issues a \$66 million IPO priced at \$17 per share, and the offering price to the public is \$22 per share. The firm's legal fees, SEC registration fees, and other administrative costs are \$350,000. The firm's stock price increases 15% on the first day. What is the firm's total cost of issuing the securities?
 \$9.9 million \$15 million \$25.25 million \$350,000

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Syed Yousuf Jamal

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• #### 2.  RE: IPO Cost

Posted 11-30-2019 08:40 AM
Underwriter's gross spread (\$22 – \$17) =\$5 per share.
Number of shares outstanding = (\$66 million/\$22 per share) = 3 million.
Underwriting cost = (\$5 per share x 3.0 million shares) = \$15.0 million
stock market value difference (opportunity cost) = ((22*1.15) -22) * 3000000 = 9,900,000 \$
legal fees, SEC registration fees, and other administrative costs = 350,000 \$
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total cost of issuing the securities = \$25.25 million

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Mohamed Elroby
Accountant
Saudi Arabia
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• #### 3.  RE: IPO Cost

Posted 12-01-2019 12:42 PM
Does anyone know when the exam will be？

• #### 4.  RE: IPO Cost

Posted 12-02-2019 08:46 AM
Hi
the case in this question related to the Firm Commitment type of underwriting which means the underwriter agreed to buy the entire issue at a certain price (17 \$ per share) regardless of the stock market price.
so, Stump Inc. would have benefited from this increase simply by choosing the second type of underwriting which is the Best Efforts type.
I hope this is enough answer

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Mohamed Elroby
Accountant