he Raven Co. has just gone public. Under a firm commitment agreement, Raven rece
ID: 2791282 • Letter: H
Question
he Raven Co. has just gone public. Under a firm commitment agreement, Raven received $15.40 for each of the 20 million shares sold. The initial offering price was $16.70 per share, and the stock rose to $18.10 per share in the first few minutes of trading. Raven paid $560,000 in direct legal and other costs and $180,000 in indirect costs.
This was asked a year ago but the answer was wrong.he Raven Co. has just gone public. Under a firm commitment agreement, Raven received $15.40 for each of the 20 million shares sold. The initial offering price was $16.70 per share, and the stock rose to $18.10 per share in the first few minutes of trading. Raven paid $560,000 in direct legal and other costs and $180,000 in indirect costs.
What was the flotation cost as a percentage of funds raised?Explanation / Answer
First we need to calculate the net amount raised by taking into consideration the cost of offer.
Net Amount Raised: (15.40×20,000,000)-560,000-180,000
=308,000,000-560,000-180,000
=$ 307,260,000
Now we need to calculate the direct costs. Direct cost includes the 560,000 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= 560,000 + (16.70-15.40)×20,000,000
=560,000+26,000,000.00
=$ 26,560,000
Indirect cost includes $ 180,000 plus the immediate price appreciation
Indirect Cost=180,000 + (18.10-16.70)×20,000,000
=180,000+28,000,000.00
=28,180,000
Therefore, Floating Cost= Total Cost/Net Amount Raised
= (26,560,000+28,180,000)/ 307,260,000
=0.178155=17.8155%
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