Question

5 years after IPO, S&S Air is planning to raise fresh equity capital by selling a large new issue of common stock. S&S Air is currently a publicly traded corporation, and it is trying to choose between an underwritten cash offer and a rights offering (not underwritten) to current shareholders. S&S Air management is interested in minimizing the selling costs and has asked you for advice on the choice of issue methods. What is your recommendation and why?

Answer 1

Underwritten cash offer is preferred over the right issue.

Step-by-step explanation:

The amount that the company spends under the options are presented below as:

Option One: Underwritten cash offer spent by the company

Particulars Amount ($)

Underwriting fee 7%

Legal fees and expenses 1800000

SEC registration fees 12000

Other filing fees 15000

Other expenses related to IPO 110000

Transfer agent fees 6500

Engraving expenses 520000

NASDAQ listing fees 100000

Total 2563500

Option 2: Right shares

Particulars Amount $

Legal fees and expenses 1800000

SEC registration fees 12000

Other filing fees 15000

Other expenses related to IPO 110000

Transfer agent fees 6500

Engraving expenses 520000

NASDAQ listing fees 100000

2563500

Thus we can see that in underwritten cash offer, the company has to pay 7 percent additionally of the initial public offerings when compared to the issue of the right shares. But however at present as the company is short of funds, opting for the right issues is not recommended.

Therefore by marginal costing, the additional benefits when underwritten cash offer is much more as compared to the underwriting fees of 7 percent as additional cost.

Hence, underwritten cash offer is preferred over the right issue.