Hw Finance

1—The main difference in the costs is the reduced possibility of underpricing in a Dutch auction. As to

which is better, we don’t actually know. In theory, the Dutch auction should be better since it should

eliminate underpricing. However, as Google shows, underpricing can still exist in a Dutch auction.

Whether the underpricing is as severe in a Dutch auction as it would be in a traditional underwritten

offer is unknown.

2. There is no way to calculate the optimum size of the IPO, so whether Mark is correct or Kim is

correct will only be told in time. The disadvantages of raising the extra cash in the IPO include 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.

4)—Because of legal repercussions, you should not provide specific advice on which option the

employees should choose. There are advantages and disadvantages to each. If the employee tenders

the stock to be sold in the IPO, the employee will lose out on any underpricing. This could be a

significant cost. However, if the employee retains the stock, he/she must hold the stock for the

lockup period, typically 180 days. Additionally, during the lockup period, the employee is legally

prohibited from hedging the price risk of the stock with any derivatives, and heavy selling by

insiders is considered a negative signal by the market. Another risk in not selling in the IPO is that

after the lockup period expires, the employees may be considered insiders, subject to...