Question

The Sugarland Co. has just gone public. Under a firm commitment agreement, the company received $32.80 for each of the 4.18 million shares sold. The initial offering price was $35.20 per share, and the stock rose to $42.60 per share in the first few minutes of trading. The company paid $913,000 in legal and other direct costs and $266,000 in indirect costs. What was the flotation cost as a percentage of funds raised? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Flotation cost percentage %

Answer 1

Net amount raised = (4,180,000 shares)($32.80) – $913,000 – $266,000 = $135,925,000

Total direct costs = $913,000 + ($35.20 – $32.80)(4,180,000 shares) = $10,945,000

Total indirect costs = $266,000 + ($42.60 - $35.20)(4,180,000 shares) = $31,198,000

Total costs = 10,945,000 + 31,198,000 = $42,143,000

Flotation cost percentage = $42,143,000 / $135,925,000 = 0.3100 or 31.00%