Question

Under a firm commitment agreement, Zeke, Co. went public and received $31.00 for each of the 7.2 million shares sold. The initial offer price was $33 and the stock rose to $35.86. 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?

a-6.73%

b-24.43%

c-25.78%

d-16.08%

e-21.11%

Answer 1

No. of shares sold				7200000
Initial offer price				33
Received amount per share				31
Direct flotation cost				560000
Indirect flotation cost				215000
Net amount raised form isssue
= (7200000*31)-560000-215000=				222425000
Stock rose to				35.86
stock appreciation is indirect cost.
Underwriting cost (33-31)=				2
(It is direct cost)
Total underwriting cost for 7.2 million shares =				14400000
Direct flotation cost				560000
Indirect flotaion cost				215000
Price appreciation in stock				20592000
(35.86-33)*7200000=
Total flotation cost of issue				35767000
Flotation cost as a percentage of fund raised = 35767000/222425000*100
				16.080477
So, flotation cost as a percentage of fund raised is 16.08%.