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CS Professional · Strategic Management and Corporate Finance · Role of Intermediaries in Fund Raising

An IPO is fully underwritten by a merchant banker who is also the lead manager. The issue is of 10,00,000 shares, and the public subscribes for only 8,50,000 shares. Under the underwriting agreement, the underwriter must take up the shortfall. How many shares must the underwriter subscribe, and what is the amount at an issue price of Rs 120 per share?

The underwriter must take up the unsubscribed shortfall of 1,50,000 shares, being 10,00,000 offered less 8,50,000 subscribed. At Rs 120 per share, the amount payable is Rs 1,80,00,000. Subscribed shares or the full issue are the wrong base for calculation.

  1. A1,50,000 shares; Rs 1,80,00,000Correct
  2. B8,50,000 shares; Rs 10,20,00,000
  3. C1,50,000 shares; Rs 1,02,00,000
  4. D10,00,000 shares; Rs 12,00,00,000

Explanation

Shortfall = 10,00,000 - 8,50,000 = 1,50,000 shares. Amount = 1,50,000 x Rs 120 = Rs 1,80,00,000. Rs 10,20,00,000 uses the subscribed shares instead of the shortfall (wrong base), and Rs 1,02,00,000 applies the wrong price of Rs 68 per share. The full-issue option ignores the public subscription.

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