Use the Following Information to Answer the Question(s) Below

question 5

Multiple Choice

Use the following information to answer the question(s) below.
Wyatt Oil has 8 million shares outstanding and is about to issue 10 million new shares in an IPO. The IPO price has been set at $15 per share, and the underwriting spread is 6%. The IPO is a big success with investors, and the share price rises to $35 the first day of trading.
-Suppose that the post IPO value of Wyatt is its fair market value.Suppose Wyatt could have issued shares directly to investors at their fair market value,in a perfect market with no underwriting spread and no under pricing.If you raise the same amount of funds that you would have with the investment banker handling the underwriting,the share price in this case is closest to:

• A) $35
• B) $37
• C) $46
• D) $61
• E) $73

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Definitions:

Shut Down

A short-term decision by a firm to cease production due to market conditions, not covering variable costs in the short run.

Average Variable Cost

The total variable costs divided by the quantity of output produced.

Perfectly Competitive

A market structure characterized by many buyers and sellers, identical products, and free entry and exit, leading to price determination by supply and demand.

Market Price

The ongoing value for buying or selling a product or service in the free market.