Question

Mark Sexton and Todd Story have been discussing the future of S&S Air. The company has been experiencing fast growth, and the two see only clear skies in the company’s future. However, the fast growth can no longer be funded by internal sources, so Mark and Todd have decided the time is right to take the company public. To this end, they have entered into discussions with the investment bank of Crowe & Mallard. The company has a working relationship with Renata Harper, the underwriter who assisted with the company’s previous bond offering. Crowe & Mallard have assisted numerous small companies in the IPO process, so Mark and Todd feel confident with this choice. Renata begins by telling Mark and Todd about the process. Although Crowe & Mallard charged an underwriter fee of 4 percent on the bond offering, the underwriter fee is 7 percent on all initial stock offerings of the size of S&S Air’s offering. Renata tells Mark and Todd that the company can expect to pay about $1,800,000 in legal fees and expenses, $12,000 in SEC registration fees, and $15,000 in other filing fees. Additionally, to be listed on the NASDAQ, the company must pay $100,000. There are also transfer agent fees of $6,500 and engraving expenses of $520,000. The company should also expect to pay $110,000 for other expenses associated with the IPO. Finally, Renata tells Mark and Todd that to file with the SEC, the company must provide three years’ audited financial statements. She is unsure about the costs of the audit. Mark tells Renata that the company provides audited financial statements as part of the bond covenant, and the company pays $300,000 per year for the outside auditor.

Q1. After deliberation, Mark and Todd have decided that the company should use a firm commitment offering with Crowe & Mallard as the lead underwriter. The IPO will be for $75 million. Ignoring underpricing, how much will the IPO cost the company as a percentage of the funds received?

Answer 1

Calculaion of IPO Cost as % of Funds Receeived:

Partcular	Amount ($)
Underwriter Fee (75000000*7/100)	52,50,000.00
Legal Fees	18,00,000.00
SEC Registration Fees	12,000.00
Other Filing Fees	15,000.00
Listing on NASDAQ	1,00,000.00
Transfer Agent Fees	6,500.00
Engraving Exp.	5,20,000.00
Other Expenses	1,10,000.00
Audit Fees	-
Total Cost (A)	78,13,500.00
IPO (B)	7,50,00,000.00
Cost as % of Funds (A/B)	10.418%

In the given case audit fees is not taken into consideration, on the presumption that as Audit Financial statements are provided as part of bond convenant in case of bond offering, the same can be used for the Purpose of IPO and therefore company need not to incur cost of $ 9,00,000 (3Lac per year*3) again.