Question

XYZ, Inc. just sold 700,000 shares in a public offering for an offering price of $24 per share. The underwriting fee was 7.50% of the issue’s total value based on the offering price. As soon as the shares were issued, the price jumped to $36 per share. What are the explicit, implicit, and total costs of the issue?

Answer 1

Answer:

explicit costs = $1,260,000

the implicit costs = $8,400,000

total costs = $9,660,000

Explanation:

the underwriter's explicit costs = total number of shares x initial price x % charged by underwriter = 700,000 x $24 x 7.5% = $1,260,000

the implicit costs = (market price - initial price) x total number of shares = ($36 - $24) x 700,000 = $8,400,000

total costs = $9,660,000