Start with the partial model in the file Ch18 P08 Build a Model.xlsx on the textbook’s Web site. Lingadalli Corporation (LC) is considering an IPO. LC has 12 million shares of common stock owned by its founder and early investors. LC has no preferred stock, debt,or short-term investments. Based on its free cash flow projection, LC ’ s intrinsic value of operations is $210 million. LC wants to raise $30 million (net of flotation costs) in net proceeds. The investment bank charges a 7% underwriting spread. All other costs associated with the IPO are small enough to be neglected in this analysis and all shares sold in the IPO will be newly issued shares. Answer the following questions.
a. What is the intrinsic stock price per share before the IPO?b. Given the target net proceeds, what amount of gross proceeds are required?c. What is projected total value of LC immediately after the IPO? Based on the total amount paid by the shareholders purchasing new shares in the IPO, what percentage of the total post-IPO value do you think the new shareholders require to justify their stock purchases?d. How many new shares must be sold in the IPO to provide the percentage of ownership required by the new shareholders? How many total shares will be outstanding after the IPO?
LC’s instrinsic Value is 210 million
LC has 12 mill shares outstanding.
Instrinsic stock price before IPO = 210 /12 = $ 17.5 per share
LC wants net 30 million after deducting 7 percent underwriting bank charges
So Gross amount to be raised is 30 / (1-0.07)
= 30 / 0.93 = 32.26 million usd
Gross Proceeds required is 32.26 million usd
The Projected Total Value of LC after IPO would be
210 + 32.26 – 2.26 = 240 million usd
Percentage stake is 32.26 / 242.26 = 13.32 percent stake
new shares to be issued is 32,260,000 / 17.5 = 1,843,429
Total shares outstanding after the IPO
= 12 mill + 1.843429 mill
= 13,843,429 shares