Question

Bethesda Biosys issues an IPO on a best-efforts basis. The company's investment bank requires a spread of 18 percent of the selling price. The average selling price is expected to be $25 per share. Four million shares are issued. What are the net proceeds for the issuer?

Answer 1

Answer:

Bethesda Biosys

Issue of an IPO:

Net proceeds for the issuer is $82 million, if all the 4 million shares are bought by investors.

Explanation:

a) Calculations:

The spread is $4.5 (18% of $25) per share, since average selling price is $25.

Therefore, the net proceed per share is $20.50 ($25 - 4.50).

And the Total Net Proceeds = $82 million ($20.50 * 4 million), assuming that all four million shares were bought by the public.

Note that the question did not provide the necessary information to make the final decision.

b) During the issue of securities, especially an IPO, underwriters, such as investment banks, pay an issuing company for the securities and then sell the securities to the public.  There is always a difference per share price that they are willing to pay the issuer and what they will collect from the investing public.  That difference is called the underwriting spread or simply the spread.

c) Best-Efforts Basis: According to investopedia.com, underwriting on best-effort basis is "an agreement between an underwriter and an issuer in which the underwriter agrees to place as much of an offering with investors as possible, but is not responsible for any portion of the offering it fails to sell."