The Wiley Oakley Co. has just gone public. Under a firm commitment agreement, Wi

Question

The Wiley Oakley Co. has just gone public. Under a firm commitment agreement, Wiley Oakley received $31.75 for each of the 7.3 million shares sold. The initial offering price was $34 per share, and the stock rose to $43.85 per share in the first few minutes of trading. Wiley Oakley paid $1,350,000 in legal and other direct costs and $210,000 in indirect costs.(Enter your answer as directed, but do not round intermediate calculations.)

What was the flotation cost as a percentage of funds raised? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

The Wiley Oakley Co. has just gone public. Under a firm commitment agreement, Wiley Oakley received $31.75 for each of the 7.3 million shares sold. The initial offering price was $34 per share, and the stock rose to $43.85 per share in the first few minutes of trading. Wiley Oakley paid $1,350,000 in legal and other direct costs and $210,000 in indirect costs.(Enter your answer as directed, but do not round intermediate calculations.)

Explanation / Answer

First of all we will calculate net amount raised and the costs associated with the offer.

Net amount raised:

= Number of shares offered times the price received by the company - Costs associated with the offer

= [(7,300,000 shares * $31.75) - ($1,350,000 + $210,000)]

= $231,775,000 - $1,560,000

= $230,215,000

The company raised $230,215,000 from the share offering. Now we will calculate the direct costs.

Since the share was offered at $34 per share, and the company received $31.75 per share. This difference is the amount that a company had to pay to the underwriters. This payment to underwriters is also a direct cost to the company. Hence, the total direct costs were:

= [$1,350,000 + (7,300,000 shares * $2.25)]

= $17,775,000

We have given the indirect costs in the question. Apart from this, there is an indirect costs i.e. immediate price appreciation. Hence, the total indirect costs were:

= [$210,000 + (7,300,000 shares * $9.85)]

= $72,115,000

Total costs = Total direct costs + Total indirect costs

= $17,775,000 + $72,115,000

= $89,890,000

The flotation cost as a percentage of funds raised:

= $89,890,000 / $230,215,000

= 39.05%

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