Assignment On

S&S Air Goes Public

Submitted To
Dr. Rumana Haque
Professor
Business Administration Discipline
Khulna University.

Submitted By
MD. Nazmul Hossain
ID: EMBA-180388
2nd Year 2nd Term.

Corporate Finance
FIN-5505
KHULNA UNIVERSITY
BUSINESS ADMINISTRATION DISCIPLINE
October 11, 2020
Question No. 1) At the end of the discussion, Mark asks Kim about the Dutch
auction IPO process. What are the differences in the expenses to S&S Air if it uses
a Dutch auction IPO versus a traditional IPO? Should the company go public
through a Dutch auction or use a traditional underwritten offering?

Answer: Dutch Auction and Traditional IPO both are type of public offerings.
However, they differ in the process of issuance of shares. Both are the methods of
rising capital for the firm via issuing new securities.
In Traditional IPO method, there is two sub options, A) Firm Commitment
Underwriting & B) Best Effort Underwriting.
Firm Commitment Underwriting: In this case Crowe & Millard agreed to
purchase share from S&S Air and sells at a higher price at the registration date or
IPO date. Here, the price difference from buying and selling is the spread. For
example, $10/share is buying price for Crowe & Millard and selling price is $17
where $7 is the profit or spread for them (Crowe & Millard).
Best Effort Underwriting: It a legal contract between firm and underwriter.
Crowe & Millard will make their “best effort” to sell S&S Air’s specified numbers
of share. However, in this situation shares are not purchased by underwriter and
whole risk on the firm. If shares are not liked by the investors, then IPO maybe
revoked and S&S Air will bear the floatation cost associated with IPO.
Dutch Auction Underwriting: In this method, share price isn’t fixed rather
underwriter arranges an auction and investors are bidding their prices for shares.
The offer price is determined based on submitted bids. In this case if S&S Air
wants to allot 10,000 shares in the IPO. A series of bids which includes no. of
shares and specified price. Importantly, the price paid by each bidder is the price at
which all 10,000 share to be sold. For this reason, it also called uniform price
auction. Because everyone pays the same price per share for the given allotment of
share. This type of IPO determines the highest price in Which S&S Air can sell the
issued shares because share prices are not fixed on the issuance date and it is also
flexible for investors to determine the value of the shares. Also it makes sure S&S
Air can sell their shares while achieving floatation cost & minimizes risk of failing
to sell the share and raising capital.
Given the description of both traditional and Dutch auction methods for offering
IPO, it is recommended to S&S Air to go for Dutch Auction with Crowe
& Millard. This recommendation is because of the mitigated cost of underpricing
the IPO. Dutch auction may not eliminate all the floatation cost but it allows
market to set the optimal price through a clear process which ensure to sell all the
issued securities.

Question No. 2: During the discussion of the potential IPO and S&S Air’s future,
Mark states that he feels the company should raise $75 million. However, Kim
points out that if the company needs more cash in the near future, a secondary
offering close to the IPO would be problematic. Instead she suggests that the
company should raise $90 million in the IPO. How can we calculate the optimal
size of the IPO? What are the advantages and disadvantages of increasing the size
of the IPO to $90 million?

Answer: Based on the current audited financial information is best way to estimate
optimal IPO. However, it is still a best guess. Kim’s point that secondary offering
close to IPO is problematic but there is no guarantee that S&S Air can get $90
Million. So calculating optimal size of the IPO is to determine the necessary
capital needs to expand operation or taking new project.
Advantages: The advantages of increasing the IPO include the additional capital
raised which contributes to the increased liquidity of the firm. And a decreased
floatation cost percentage because of higher amount raised. There also less likely
to need for secondary offering near future.
Disadvantages: The main disadvantages of increased size of the IPO is that there
may be insufficient demand for the IPO and $90 Million will not be raised.

Question No. 3: After deliberation, Mark and Todd have decided that the company
should use a firm commitment offering with Crowe & Mallard as the lead
underwriter. The IPO will be for $75 million. Ignoring underpricing, how much
will the IPO cost the company as a percentage of the funds received?

Answer: Calculation of the IPO:

Costs Amounts
Gross Amount Raised $75,000,000
Legal Fees ($1,800,000)
SEC Registration Fees ($12,000)
Other Filing Fees ($15,000)
NASDAQ Listing ($100,000)
Transfer Agent Fees ($6,500)
Engraving Expenses ($520,000)
Other Expenses ($110,000)
Underwriting Fees (7%) ($5,250,000)
Net Amount Raised $67,186,500

Total cost = $75,000,000-$67,168,500 = $7,813,500

∴ Percentage of the IPO cost= $7,813,500/$75,000,000 = 10.42%

Question No. 4: Many employees of S&S Air have shares of stock in the company
because of an existing employee stock purchase plan. To sell the stock, the
employees can tender their shares to be sold in the IPO at the offering price, or the
employees can retain their stock and sell it in the secondary market after S&S Air
goes public. Todd asks you to advise the employees about which option is best.
What would you suggest to the employees?

Answer: The decision of selling employees stock in the IPO or secondary offering
is totally depend on Individual risk decision. Yet company and employees can
agree to lock up period 180 days or more. This would prevent employees or other
insiders to sell their stock in the IPO or open market until 6 months.
From the employee’s perspective, they would be best served selling their shares on
the open market on the day of the IPO. Most IPOs are underpriced and result in a
first day jump. By selling on the open market on that day, the employees would
receive the best price possible. If they sold as part of the IPO, their shares would be
underpriced and they would not receive as much as they could on the open market.