Question

The Raven Co. has just gone public. Under a firm commitment agreement, Raven received $18.40 for each of the 15 million shares sold. The initial offering price was $20.00 per share, and the stock rose to $25.60 per share in the first few minutes of trading. Raven paid $520,000 in direct legal and other costs and $160,000 in indirect costs. What was the flotation cost as a percentage of funds raised? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

The flotation cost as a percentage of funds raised is 39.47%

Explanation:

In order to calcuate the flotation cost as a percentage of funds raised we would have to make first the following calculations:

Net amount raised = (15,000,000 shares)($18.40) – $520,000 – $160,000 = $275,320,000

Total direct costs = $520,000 + ($20.00 – $18.40)(15,000,000 shares) = $24,520,000

Total indirect costs = $160,000 + ($25.60 – $20.00)(15,000,000 shares) = $84,160,000

Total costs = $24,520,000 + $84,160,000 = $108,680,000

Therefore, Flotation cost percentage = $108,680,000 / $275,320,000 = 0.3947 or 39.47%