medium · Investment Banking
An IPO is priced at 15.00 with a15%over-allotment. The stock immediately 'pops' to20.00. The underwriters exercise the shoe.
What is the 'cost' to the company of issuing these shares at 15.00 instead of the market price of20.00?
- The company must pay a 'penalty fee' to the underwriters to exercise the shoe.
- There is no cost because the company received the exact price it negotiated.
- The 5.00 difference per share is considered 'money left on the table.'
- The cost is recorded as a 'derivative loss' on the income statement.
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