Question
In: Finance
Under a firm commitment agreement, Zeke, Co. went public and received $35.25 for each of the...
Under a firm commitment agreement, Zeke, Co. went public and received $35.25 for each of the 8.9 million shares sold. The initial offer price was $38 and the stock rose to $41.38. The company paid $560,000 in direct flotation costs and $215,000 in indirect costs. What was the flotation cost as a percentage of funds raised?
a)27.63
b)8
c)17.68
d)29.14
e)23.6
Solutions
Expert Solution
| Net Amount Raised by Zeke Co. | |||||||||
| = Amount Received - Direct Flotation Cost - Indirect Flotation Cost | |||||||||
| = (No of Shares*Amount Per Share) - Direct Flotation Cost - Indirect Flotation Cost | |||||||||
| = (8,900,000*$35.25) - $560,000 - $215,000 | |||||||||
| = $313,725,000 - $560,000 - $215,000 | |||||||||
| = $312,950,000 | |||||||||
| Total Costs | |||||||||
| = Direct Flotation Cost + Indirect Cost | |||||||||
| + (Rising Stock Price - Amount Received per share)*No of Shares | |||||||||
| = $560000 + $215000 - ($41.38 - $35.25)*8900000 | |||||||||
| = $775000 - $6.13*8900000 | |||||||||
| = $775000 - $54557000 | |||||||||
| = $55,332,000 | |||||||||
| Flotation Cost % | |||||||||
| = Total Cost / Net Amount Raised *100 | |||||||||
| = $55,332,000 / $312,950,000 * 100 | |||||||||
| = 17.68% | |||||||||
| So answer is (c) 17.68% | |||||||||
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