Question

Global Traders is offering 130,000 shares of stock to the public in a general cash offer. The offer price is $38 a share and the underwriter's spread is 8 percent. The administrative costs are estimated at $865,000. How much will Global Traders receive from this stock offering as net proceeds assuming the issue is completely sold?

$3,370,800

$3,679,800

$4,490,000

$4,075,000

$3,828,400

Deep Hollow Oil issued 135,000 shares of stock last week. The underwriters charged a spread of 8.05 percent in exchange for agreeing to a firm commitment. The legal and accounting fees amounted to $418,000 and the company incurred $48,000 in indirect costs. The offer price was $33 a share. Within the first hour of trading, the stock price increased to $36 a share. What was the flotation cost as a percentage of the funds raised?

28.89 percent

33.03 percent

26.47 percent

20.55 percent

33.87 percent

Answer 1

How much will Global Traders receive from this stock offering as net proceeds assuming the issue is completely sold?

Net proceeds = [130,000 ×$38 ×(1 -.08)] - $865,000 = $3,679,800

Deep Hollow Oil issued 135,000 shares of stock last week.What was the flotation cost as a percentage of the funds raised?

Flotation costs = {[$36 - $33 ×(1 - .0805)] ×135,000} + $418,000 + 48,000 = $1,229,627.50

Funds raised = [$33 ×(1 - .0805) ×135,000] - $418,000 - 48,000 = $3,630,372.50

Cost percentage = $1,229,627.50 / $3,630,372.50 = .3387, or 33.87 percent