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Mayo Corp. has just completed an initial public offering. The firm sold three million shares at...

Mayo Corp. has just completed an initial public offering. The firm sold three million shares at an offer price of $8 per share. The underwriting spread was $.50 a share. The price of the stock closed at $11 per share at the end of the first day of trading. The firm incurred $100,000 in legal, administrative, and other costs. What were flotation costs as a fraction of funds raised?

PLEASE SHOW ALL CALCULATIONS

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Answer #1


Flotation cost = $0.50 per share spread x 3,000,000 shares + Legal and admin costs

Flotation cost = $0.50 x 3,000,000 + $100,000

Flotation cost = $1,600,000

.

Fund raised = Offer price x Total number of shares

Fund raised = $8 x 3,000,000

Fund raided = $24,000,000

.

Flotation cost a fraction of the fund raised = Floatation cost / Fund raised = $1,600,000/$24,000,000

Flotation cost a fraction of the fund raised = 0.066667 or 6.67%

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(We should ignore closing price because that price is not received by firm)

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