P11-1 West Coast Manufacturing Company (WCMC) is executing an initial public offering with the following characteristics. The company will sell 10 million shares at an offer price of $25 per share, the underwriter will charge 7% underwriting fee, and the shares are expected to sell for $32 per share by the end of the first day’s trading. Assume that this IPO is executed as anticipated. a. Calculate the initial return earned by investors who are allocated shares in the IPO.
Profit per share = $7
Return for investor =7/25=28%

b. How much will WCMC receive from this offering?
Total no shares issued = 10 million
Price per share = $25
Total amount collected from investors 25*10 million = $250 million.
Underwriting fee 7%
Underwriting fee paid from collection =7%*250 million = $17.50million.
Net proceeds = $250 million - $17.50 = $232.50 million
WCMC will receive 232.50 million

c. What is the total cost (underwriting fee and under pricing) of this issue to (WCMC)?
Total of issue
Underwriting fee = $17.50 million
Under-pricing value = profits earned by investors at end of 1 day =$7*10 million = $70 million
Total cost of issue =$17.5 million = $70 million = $87.50 million
P11-2 Suppose you purchase shares of Engel, Inc (EI) which recently executed an IPO at the post-offering market price of $32 per share and you hold the shares for one year. You the sell you EI shares for $35 per share. EI does not pay dividends and you not subject to capital gain taxation. During this year, the return on the overall stock market was 11%. What net return did you earn on your EI shares investment? Assess this return in light of overall market return.
The purchase price of the share is $32 and your selling price is $35. This earns you a profit of $ 3 per share, i.e. returns of 10.94%.
(32*(35*100)/10) = 10.9375. Where, 32 is the Purchase Price, 35 is the Sell