The Raven Co. has just gone public. Under a firm commitment agreement, Raven rec
ID: 2642552 • Letter: T
Question
The Raven Co. has just gone public. Under a firm commitment agreement, Raven received $17.30 for each of the 15 million shares sold. The initial offering price was $21.00 per share, and the stock rose to $23.40 per share in the first few minutes of trading. Raven paid $540,000 in direct legal and other costs and $170,000 in indirect costs.
What was the flotation cost as a percentage of funds raised? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Floation cost ________%
The following are NOT the answers:
21.38%
17.38%
17.69%
17.62%
0.07%
The Raven Co. has just gone public. Under a firm commitment agreement, Raven received $17.30 for each of the 15 million shares sold. The initial offering price was $21.00 per share, and the stock rose to $23.40 per share in the first few minutes of trading. Raven paid $540,000 in direct legal and other costs and $170,000 in indirect costs.
Explanation / Answer
The underwriting commission is $3.70 ( Share price as per IPO $21.00 - $17.30 Share price received)
Total underwriting commision is $3.7 X 1,50,000,00 = $5,55,000,00
Total of flotation cost = Underwriting commission + legal fees + other indirect expense
Total flotation cost = 5,55,000,00 + 5,40,000 + 1,70,000 =$ 5,62,10,000
Proceeds received from company = $17.30 x 1,50,000,00 = $2,59,500,000
Flotation cost percentage = $5,62,10,000/ $2,59,500,000 = 21.66%
Increase in the share price will not effect the flotation cost percentage anyway.
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