The Raven Co. has just gone public. Under a firm commitment agreement, Raven rec

Question

The Raven Co. has just gone public. Under a firm commitment agreement, Raven received $17.80 for each of the 25 million shares sold. The initial offering price was $19.40 per share, and the stock rose to $22.90 per share in the first few minutes of trading. Raven paid $840,000 in direct legal and other costs and $320,000 in indirect costs. What was the flotation cost as a percentage of funds raised? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Flotation cost %

Explanation / Answer

First we need to calculate the net amount raised by taking into consideration the cost of offer.

Net Amount Raised: (17.80×25,000,000)-840,000-320,000

                                    =$ 443,840,000.00

Now we need to calculate the direct costs. Direct cost includes the 840,000 legal cost plus the cost paid to underwriters. The cost paid to underwriters is the offer price –receive price times the number of shares issued.

Total Direct Costs= 840,000 + (19.40-17.80)×25,000,000

                               =$ 40,840,000.00

Indirect cost includes $ 320,000 plus the immediate price appreciation

Indirect Cost=320,000 + (22.90-19.40)×25,000,000

                     =$ 87,820,000.00

Therefore, Floating Cost= Total Cost/Net Amount Raised

                                         = (40,840,000.00+87,820,000.00)/ 443,840,000.00

                                          =28.98%

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