Question

The Raven Co. has just gone public. Under a firm commitment agreement, Raven received $18.50 for each of the 20 million shares sold. The initial offering price was $22.80 per share, and the stock rose to $24.60 per share in the first few minutes of trading. Raven paid $580,000 in direct legal and other costs and $190,000 in indirect costs. What was the flotation cost as a percentage of funds raised? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Flotation cost %

Answer 1

46.79%

Step-by-step explanation:

Net amount raised = Sale Proceeds - Direct Legal Costs - Indirect Costs

Net amount raised = ($18.50 x $20,000,000) - $580,000 - $190,000

Net amount raised = $370,000,000 - $770,000

Net amount raised = $369,230,000

Share offered at price = $22.80 per share

Amount received per share = $18.50

Underwriting spread = $22.80 - $18.50 = $4.30 per share

Total underwriting spread = Underwriting spread x no. of shares offered

Total underwriting spread = $4.30 x 20,000,000

Total underwriting spread = $86,000,000

Direct cost = Total underwriting spread + Direct Legal Costs

Direct cost = $86,000,000 + $580,000

Direct cost = $86,580,000

Indirect cost = Indirect cost + Total underwriting spread

Indirect cost = $190,000 + ($22.80 - $18.50) x $20,000,000

Indirect cost = $190,000 + $86,000,000

Indirect cost = $86,190,000

Total Debt Capital = Direct Cost + Indirect Cost

Total Debt Capital = $86,580,000 + $86,190,000

Total Debt Capital = $172,770,000

Flotation cost % = Total Debt Capital / Equity Capital raised

Flotation cost % = $172,770,000 / $369,230,000 x 100

Flotation cost % = 46.79%