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Hop-in Food Stores, Inc.

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Hop-In Food Stores, Inc.
Strategic Analysis Mr. Merriman faces the difficult decision in setting the price of the initial public offering for the new equity issue for Hop-In Food Stores, Inc. First to address is the problem with regards to over- or under-pricing the stock. Both outcomes yield negative attitudes towards the company. When addressing the possibility of over-pricing, the underwriter must understand that the stock may not sell the full amount of shares at the desired price, resulting in negative outlooks towards the corporation, as well as lowered stock prices of the insiders of Virginia, whom have already invested in the company. In order to remedy this, shelf-registration can be employed in order to reduce the amount of shares distributed initially, lowering costs of a secondary equity issue in the future, and possibly capturing the market once the share price hits a balance point. Also with over-pricing, there is the winner’s curse dilemma, in which the bidder finds remorse for spending such a great amount for a stock that others have not obviously intended to pay. Now, with under-pricing, though the immediate effects are not seen towards the company, this greatly hurts the shareholders. In under-pricing, the stock price may close the day much higher than initially sold, in which case that volume of cash between the initial price and closing price multiplied by the number of shares could have originally been sent to the previous shareholders of the company. In some cases, the previous shareholders may not complain, as they see themselves as wealthier than before, but the more intellectual shareholder will realize the opportunity in revenue that they could have seen. Personally, I believe that over-pricing is more immediately irritating, but that under-pricing is more harmful for the long-run. Mr. Merriam should consider the valuation of the...

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