The Green Hills Co. has just gone public. Under a firm commitment agreement, Gre

Question

The Green Hills Co. has just gone public. Under a firm commitment agreement, Green Hills received $26.04 for each of the 7 million shares sold. The initial offering price was $28 per share, and the stock rose to $32.30 per share in the first few minutes of trading. Green Hills paid $1,850,000 in direct legal and other costs and $370,000 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))

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))

Explanation / Answer

Answer: It cost the company $1.96/share (28-26.04) in underwriting cost, times 7 million shares = $13720000. Add the legal costs of $1850,000 plus the indirect costs of $370,000 for a total cost of $15940000.

The company received proceeds of $26.04 x 7000,000 = $182280,000

Flotation cost as a percentage: 15940000/182280000 = 0.08745 = 8.745%

The fact that the stock price rose to $32.30 within minutes after trading started does not benefit the company directly in any way and therefore does not affect our calculation. That price increase went only to the IPO investors.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.