Question
In: Finance
Superman Enterprises has just completed an initial public offering. The firm sold 800,000 new shares (the...
Superman Enterprises has just completed an initial public offering. The firm sold 800,000 new shares (the primary offering). In addition, existing shareholders sold 325,000 shares (the secondary issue). The new shares were offered to the public at $14.50 per share and underwriters received a spread of $1.21/share. The legal, administrative, and other costs were $175,000 and were split proportionately between the company and the selling stockholders. The amounts a company receive is $10632000. Suppose that on the first day of trading, the price of superman's stock is $18/share. The cost to the firm from the underpricing is $2800000. So, what are the total costs of the issue to the firm as a percentage of the funds raised? Answer is 33.56+-0.03. Please write down the details calculation. Thank you!
Solutions
Expert Solution
| Cost of Funds raised to company | |
| Underwriting spread (800000*1.21) | 968000 |
| legal, administrative, and other costs [175000*800000/1125000] | 124444 |
| Cost of underpricing | 2800000 |
| Total cost of issue to firm | 3892444 |
Amount of funds raised =Issue price *number of shares offered by firm
= 14.50*800000
= 11600000
total costs of the issue to the firm as a percentage of the funds raised = Total cost of issue to firm/Amount of funds raised
= 3892444/11600000
= 33.56%
**Total shares for allocation of Legal, administrative, and other costs between company and shareholders = 800000+325000 = 1125000 shares
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