Use the Table for the Question(s)below

question 85

Multiple Choice

Use the table for the question(s) below.
The founders and owners of a private company have funded it through the following rounds of investment:
The owners decide to take the company public through an IPO,issuing 1 million new shares.Assuming that they successfully complete the IPO,the net income for the next year is estimated to be $5 million.The price of shares is set using average price-earnings ratios for similar businesses of 17.0.
-What is the major reason that underwriters tend to offer stocks in an IPO at a price that is below that which the market will pay?

• A)to gain from the rise in value of any stocks they hold after the IPO
• B)to reduce their exposure to losses from unsold stock
• C)to benefit from greenshoe provisions
• D)to increase their spread
• E)The market price is unknown until after the IPO.

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