Question

The Raven Co. has just gone public. Under a firm commitment agreement, Raven received 20.00 for each of the 6 million shares sold. The initial offering price was $21.20 per share, and the stock rose to $26.29 per share in the first few minutes of trading. Raven paid $1,320,000 in direct legal and other costs, and $462,000 in indirect costs. What was the flotation cost as a percentage of funds raised?

Multiple Choice

• 33.43%

• 26.22%

• 7.60%

• 34.77%

• 32.09%

Answer 1

Solution :-

Total Amount Received = $20 * 6,000,000 = $120,000,000

Net Amount Raised = $120,000,000 - $1,320,000 - $462,000 = $118,218,000

Total Direct Cost = $1,320,000 + ( $21.20 - $20.00 ) * 6,000,000

= $8,520,000

Total Indirect Cost = $462,000 + ( $26.29 - $21.20 ) * 6,000,000

= $31,002,000

Total Cost = $8,520,000 + $31,002,000 = $39,522,000

Net Flotation Cost Percentage = ( $39,522,000 / $118,218,000 ) = 0.3343 = 33.43%

Therefore Correct Answer is (A)

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