Question

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?

Multiple Choice

• 8.00%

• 23.60%

• 27.63%

• 29.14%

• 17.68%

Answer 1

Total Money received = No. of shares * money received

Total money received = 8.9 million * $35.25 = $313.73 million (A)

Cost of raising funds = Direct and indirect cost = $560,000 + $215,000 = $775,000 or 0.78 million (B)

Cost of IPO = (Intital price - net price recieved) * no. of shares

Cost of IPO = ($38 - $35.25) * 8.9 million = $24.48 million (C)

Net money raised = A - B = $313.73 - $0.78 = $312.95 million

Cost as a percentage of fund raised = Cost of raising fund / net money raised

Cost % = (0.78 + 24.48 )/ 312.95 = 8.07% ~ 8%

OPTION A