A firm desires to sell stock to the public. The underwriter charges $0.4 million in fees and offers to buy six million shares from the firm at a price of $30 per share.

A firm desires to sell stock to the public. The underwriter charges $0.4 million in fees and offers to buy six million shares from the firm at a price of $30 per share. In addition, registration and audit fees total $120,000, and marketing and miscellaneous fees add up to another $65,000. The underwriter expects to earn gross proceeds per share of $36. a) What is the issuing firm's out-of-pocket dollar transaction cost to issue the stock? (10 marks) b) Immediately after the stock was issued, the stock price rose to $38. What is the issuing firm's opportunity cost? (10 marks) c) What is the total issuance cost, including opportunity costs, as a percentage of the total funds available to the issuing firm? (10 marks)

Solutions

Expert Solution

Answer : (a.) Calculation of issuing firm out of pocket expense

= Underwriting charges + Registration and Audit fees + Marketing and miscellaneous fees

= 400000 + 120000 + 65000

= 585000

(b.) Opportunity Cost = Number of shares * Differences in price

= 6,000,000 * (38 - 30)

= 48,000,000

(c.) Funds Available = (6,000,000 * 30) - 585000

= 179415000

Total Cost as % of funds available = (585000 + 48000000) / 179415000

= 27.08%

jeff jeffy answered 2 years ago

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