Problem 1: A company is going public at $16 and will use theticker XYZ....

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Accounting

Problem 1: A company is going public at $16 and will use theticker XYZ. The underwriters will charge a 7 percent spread. Thecompany is issuing 20 million shares, and insiders will continue tohold an additional 40 million shares that will not be part of theIPO. The company will also pay $1 million of audit fees, $2 millionof legal fees, and $500,000 of printing fees. The stock closes thefirst day at $19.
The company in Problem 1 grants a 15 percent overallotmentoption to the underwriter. The underwriter issues shares that arebacked by the entire overallotment option but has not yet exercisedthe option. a. Explain what will happen if the price of the stockincreases to $22. Describe the underwriter profits from theoverallotment option in your explanation.
b. Explain what will happen if the price of the stock decreases to$11.50. Describe the underwriter profits from the overallotmentoption in your explanation.

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Brief Explanation Overallotment option is also called Green Shoe Option Under a Greenshoe optionoverallotment option the underwriter of an IPO has the right but not the obligation to buy shares from the issuer at the issue price Thus the underwriter can sell additionally 35 Million shares under the overallotment option however the underwriter does not have these shares to sell so See Answer

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In: AccountingProblem 1: A company is going public at $16 and will use theticker XYZ. The...Problem 1: A company is going public at $16 and will use theticker XYZ. The underwriters will charge a 7 percent spread. Thecompany is issuing 20 million shares, and insiders will continue tohold an additional 40 million shares that will not be part of theIPO. The company will also pay $1 million of audit fees, $2 millionof legal fees, and $500,000 of printing fees. The stock closes thefirst day at $19.The company in Problem 1 grants a 15 percent overallotmentoption to the underwriter. The underwriter issues shares that arebacked by the entire overallotment option but has not yet exercisedthe option. a. Explain what will happen if the price of the stockincreases to $22. Describe the underwriter profits from theoverallotment option in your explanation.b. Explain what will happen if the price of the stock decreases to$11.50. Describe the underwriter profits from the overallotmentoption in your explanation.