Question

Moonscape has just completed an initial public offering. The firm sold 5 million shares at an offer price of $10 per share. The underwriting spread was $.40 a share. The price of the stock closed at $15 per share at the end of the first day of trading. The firm incurred $500,000 in legal, administrative, and other costs. What were flotation costs as a fraction of funds raised?

Answer 1

The flotation costs as a fraction of funds raised can be calculated by adding up the direct costs (flotation expenses) and the indirect costs (underpricing and underwriting spread) and dividing this sum by the total funds raised. In this case, the flotation costs amount to $0.55 per share.

Step-by-step explanation:

The flotation costs as a fraction of funds raised can be calculated by adding up the direct costs (flotation expenses) and the indirect costs (underpricing and underwriting spread) and dividing this sum by the total funds raised.

1. Direct costs: The direct costs in this case include the legal, administrative, and other costs, which amount to $500,000.
2. Indirect costs: The indirect costs include the underpricing and the underwriting spread. The underpricing is the difference between the offer price and the closing price on the first day of trading. In this case, the underpricing would be $15 - $10 = $5 per share. The underwriting spread is the difference between the offer price and the underwriting price, which is $0.40 in this case.

To calculate the flotation costs as a fraction of funds raised:

1. Calculate the total direct and indirect costs: $500,000 + (5,000,000 shares * $5 per share) + (5,000,000 shares * $0.40 per share) = $27,500,000
2. Divide the total costs by the funds raised: $27,500,000 / (5,000,000 shares * $10 per share) = $0.55 per share

Therefore, the flotation costs as a fraction of funds raised is $0.55 per share.