MANAGERIAL FINANCE –BUS503
Professor : Rob Shah, MBA, CPA, CMA
Course Dates : 01/12 – 03/08
Name : NAVEEN XAVIER
The purpose of this paper is to summarize the Case Study The MBA Decision. This case discusses East Coast Yachts : Goes Public. The purpose of this paper is to analyze options and make the decision that is going to be the most fiscally responsible in the long run. This decision will be achieved by answering the 4 questions at the end of the case study.
The MBA Decision Case Study Analysis 3
East Coast Yachts: Goes Public
1. The largest difference in the costs is the definitely the reduced possibility of under pricing in a Dutch auction. I cannot determine which one is better than the other. In theory, the Dutch auction should be better since it should eliminate under pricing. According to Google shows, under pricing can still exist in a Dutch auction. Whether the under pricing is a severe in a Dutch auction as it would be in a traditional underwritten offer is unknown.
2. There is no type of formula I can determine who is more correct. Dan and Larissa will have to see where things stand a few years down the road and base it off of performance. The biggest disadvantage of raising the extra cash in the IPO includes the agency costs of excess cash. The extra cash may encourage management to act carelessly. The extra cash will also earn a small return unless invested in income producing assets. At best, cash and short-term investments are a zero NPV investment. The advantages of the increased IPO size include the increased liquidity for the company, and the lower probability that the company will have to go back to the primary market in the near term future. The increased size will also reduce the costs of the IPO on a percentage of funds raised, although this may not be a large advantage.
3. The underwriter fee should be around 7 percent of the amount raised:
Underwriter fee = $70,000,000(.07)
Underwriter fee = $4,900,000
The company should currently provide audited financial statements due to the bond covenants. The audit costs are not incremental costs and should not be included in the calculation of the fees. The sum of the other fees are as followed:
Total other fees = $1,500,000 + 15,000 + 20,000 + 100,000 + 8,500 + 525,000 + 75,000
Total other fees = $2,243,500
This means the total fees are:
Total fees = $4,900,000 + 2,243,500
Total fees = $7,143,500
The net amount raised is the IPO offer size minus the…