ques4 The Collins Co. has just gone public. Under a firm commitment agreement. C
ID: 2765591 • Letter: Q
Question
ques4
The Collins Co. has just gone public. Under a firm commitment agreement. Collins received $32.90 for each of the 4.19 million shares sold. The initial offeFind theg price was $35.30 per share, and the stock rose to $42.80 per share in the first few minutes of trading. Collins paid $914,000 in legal and other direct costs and $268,000 in indirect costs. (Enter your answer as directed, but do not round intermediate calculations.) Required: 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).)Explanation / Answer
Net amount raised = (4,190,000 shares x $32.90) – 914,000 – 268,000
Net amount raised = $137,851,000 -1,182,000
The company received $139,033,000.
Underwriters Charge =(35.30-32.90) x 4,190,000= $10,056,000
The share was offered at $35.30 per share, and the company received $32.90 per share.
The difference, which is the underwriters spread, is also a direct cost.
The total direct costs were:
Total direct costs = $914,000 + $10,056,000
Total direct costs = $10,970,000
Total indirect costs:
Total indirect costs = $268,000 + ($42.80 – $35.30)(4,190,000 shares)
Total indirect costs = $268,000+ $7.5 x 4,190,000
Total indirect costs = $268,000+ $31,425,000
Total indirect costs = $31,693,000
Total costs:
Total costs = $10,970,000 + $31,693,000
Total costs = $42,663,000
The floatation costs as a percentage of the amount raised is the total cost divided by the amount raised, so
Floatation cost percentage = $42,663,000/$139,033,000=30.68%
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