5. Issue Price and Stock Valuation

F: Share Issue Price and Stock Valuation

Now that we know the IPO proceeds (Step C) as well as the number of offered shares (Step E), we can easily compute the relevant stock prices. In particular:

  • Net Issue Price: Price at which the firm and the selling shareholders sell shares to the underwriting syndicate.
  • Issue Price: Price at which the syndicate sells shares to the primary investors.
  • Post-IPO Stock Price: Price at which the shares are expected to trade on the stock exchange.

  

To compute these prices, we need to know the following information from the preceding sections:

   

Total Net Proceeds $345.00 million
Gross Proceeds $370.97 million
Post-IPO Market Value of Equity $740.00 million
Shares Placed with Primary Investors 19.52 million
Total Shares Outstanding after IPO 33.83 million

  

With this, we can compute the relevant prices:

  • Net Issue Price: The firm and the selling shareholders sell 19.52 million shares in exchange for net proceeds of $345 million. On a per-share basis, the net issue price, therefore, is $17.67:
      
    \( \text{Net Issue Price} = \frac{\text{Total Net Proceeds}}{\text{Total Shares Placed}} = \frac{345}{19.52} = 17.67 \)
      
  • Issue Price: The same amount of shares (19.52 million) will be sold to the primary investors for gross proceeds of $370.97 million. The issue price, therefore, is $19.00:
       
    \( \text{Issue Price} = \frac{\text{Gross Proceeds}}{\text{Total Shares Placed}} = \frac{370.97}{19.52} = 19.00 \)
      
  • Post-IPO Stock Price: Finally, the expected post-IPO equity value is $740 million, with a total of 33.83 million shares outstanding. Consequently, the expected post-IPO stock price is $21.85:
      
    \( \text{Post-IPO Stock Price} = \frac{\text{Post-IPO Market Value of Equity}}{\text{Post-IPO Shares outstanding}} = \frac{740.00}{33.83} = 21.85 \)

 

The following table summarizes the computation of the relevant prices:

 

Net Issue Price (paid by Underwriter to Firm and Selling Shareholders)
Total Net Proceeds 345.00
./. Total Number of Shares Placed 19.52
Net Issue Price 17.67
Issue Price (paid by Primary Investors to Underwriter)
Total Gross Proceeds 370.97
./. Total Number of Shares Placed 19.52
Issue Price 19.00
Expected Post-IPO Stock Price
Issue Price 19.00
× (1 + Expected Underpricing) 1.15
Expected Post-IPO Stock Price 21.85

 

A quick verification confirms that these prices are consistent with the general deal terms:

  • The Expected Post-IPO Stock Price is 15% above the Issue Price (=21.85/19.00 − 1), implying that primary investors can indeed expect to earn a first-day return of 15% (underpricing).
  • The Net Issue Price is 7% below the Issue Price (=17.67/19.00 − 1), consistent with an Underwriter Discount of 7%.