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The Raven Co. has just gone public. Under a firm commitment agreement, Raven received 18.25 for...
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The Raven Co. has just gone public. Under a firm commitment agreement, Raven received 18.25 for each of the 8 million shares sold. The initial offering price was $19.89 per share, and the stock rose to $26.06 per share in the first few minutes of trading. Raven paid $1,360,000 in direct legal and other costs, and $408,000 in indirect costs. What was the flotation cost as a percentage of funds raised? |
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Expert Solution
Calculation of Flotation Cost as Percentage of Funds Raised
Flotation Cost as Percentage of Funds Raised = Total Flotation Cost / Funds Raised
Calculation of Net Funds Received
Net Funds Received = (Price per share * Number of shares sold) - Direct Legal Cost - Indirect Cost
= (18.25 * 8,000,000) - 1,360,000 - 408,000
= 146,000,000 - 1,360,000 - 408,000
= 144,232,000
Total Direct Flotation Cost = 1,360,000 + (Underwriter's Spread * Number of shares sold)
= 1,360,000 + [(19.89 - 18.25) * 8,000,000]
= 1,360,000 + 13,120,000
= 14,480,000
Total Indirect Cost = Indirect Cost + Immediate Price Appreciation Expenses
= 408,000 + [(26.06 - 19.89) * 8,000,000]
= 408,000 + 49,360,000
= 49,768,000
Total Flotation Cost = Total Direct Flotation Cost + Total Indirect Cost
= 14,480,000 + 49,768,000
= 64,248,000
Flotation Cost as Percentage of Funds Raised = Total Flotation Cost / Funds Raised
Flotation Cost as Percentage of Funds Raised = 64,248,000 / 144,232,000
= 44.544899883 or 44.54%
jeff jeffy answered 1 year agoRelated Solutions
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