You are negotiating with your underwriters in a firm commitment offering of 

88 

million primary shares. You have two​ options: set the IPO price at 

​$21.0021.00 

per share with a spread of 

88​%, 

or set the price at 

​$20.5020.50 

per share with a spread of 

6 %6%. 

Which option raises more money for your​ firm?

Question content area bottom

Part 1

The net price to the firm of the first option is 

​$enter your response here. 

 ​(Round to the nearest​ cent.)

Part 2

The net price to the firm of the second option is 

​$enter your response here. 

 ​(Round to the nearest​ cent.)

Part 3

The 

▼
 
first

second
 
option raises more money for your firm.  ​(Select from the​ drop-down menu.)

In a firm commitment offering, the net price to the firm is calculated by subtracting the underwriting spread from the IPO price. Let's break it down for both options.

### Part 1: The net price to the firm of the first option

- IPO price: \$21.00
- Spread: 8%

The spread is 8% of the IPO price, so the amount that goes to the underwriters is:
\[
\text{Spread Amount} = \text{IPO price} \times \text{Spread} = 21.00 \times 0.08 = 1.68
\]

Therefore, the net price to the firm for each share is:
\[
\text{Net Price} = 21.00 - 1.68 = 19.32
\]

### Part 2: The net price to the firm of the second option

- IPO price: \$20.50
- Spread: 6%

The spread is 6% of the IPO price, so the amount that goes to the underwriters is:
\[
\text{Spread Amount} = \text{IPO price} \times \text{Spread} = 20.50 \times 0.06 = 1.23
\]

Therefore, the net price to the firm for each share is:
\[
\text{Net Price} = 20.50 - 1.23 = 19.27
\]

### Part 3: Which option raises more money?

- First option: \$19.32 per share
- Second option: \$19.27 per share

Since the first option has a higher net price per share, **the first option raises more money** for the firm.

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Would you like a detailed breakdown of any of these calculations? Here are 5 additional questions to explore the topic:

1. How do underwriting spreads impact the total proceeds in an IPO?
2. What factors influence the choice between different IPO pricing strategies?
3. Can a higher IPO price always guarantee more money for the firm?
4. How does the underwriter's risk level affect the spread in a firm commitment offering?
5. How does the number of shares offered in an IPO affect the total proceeds?

**Tip**: It's crucial to consider both the IPO price and the spread when deciding on an offering structure, as a lower spread can sometimes lead to higher net proceeds for the firm.

You are negotiating with your underwriters in a firm commitment offering of 88 million primary shares. You have two options: set the IPO price at $21.00 per share with a spread of 8%, or set the price at $20.50 per share with a spread of 6%. Which option raises more money for your firm?

Compare two IPO pricing options: $21.00 with an 8% spread or $20.50 with a 6% spread. Learn how to calculate the net price to the firm using basic percentage calculations. This problem focuses on key math concepts such as percentage and multiplication. Suitable for students in Grades 9-11.

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