The Rouge Co. has just gone public. Under a firm commitment agreement, Rouge rec
ID: 2633859 • Letter: T
Question
The Rouge Co. has just gone public. Under a firm commitment agreement, Rouge received $19.00 for each of the 25 million shares sold. The initial offering price was $21.70 per share, and the stock rose to $22.70 per share in the first few minutes of trading. Rouge paid $880,000 in direct legal and other costs and $340,000 in indirect costs.
What was the flotation cost as a percentage of funds raised? (Round your answers to 2 decimal places. (e.g., 32.16))
The Rouge Co. has just gone public. Under a firm commitment agreement, Rouge received $19.00 for each of the 25 million shares sold. The initial offering price was $21.70 per share, and the stock rose to $22.70 per share in the first few minutes of trading. Rouge paid $880,000 in direct legal and other costs and $340,000 in indirect costs.
Explanation / Answer
We are given the following information:
Price received = $19.00 per share
Number of shares = 25,000,000
Initial offering price = $21.70 per share
Stock highest point = $22.70 per share
Direct cost = $880,000
Indirect cost = $340,000
First, we need to calculate the net funds rose without any direct or indirect costs:
Net Funds Raised = (Number of Shares x Price Received) - Direct Cost - Inidirect Cost
= (25,000,000 x $19) - $880,000 - $340,000
= $473,780,000
Next, we need to calculate the direct and indirect cost taking into account the movements of the stock price on the first day it was publicly traded.
The total direct costs = Direct cost + (IPO price - Price recived) x Number of shares
= $880,000 + ($21.70 - $19) x 25,000,000
= $68,380,000
The Total Indirect Costs = Indirect costs + (Highest Price - IPO price) x Number of Shares
= $340,000 + ($22.70 - $21.70 ) x 25,000,000
= $25,340,000
Total Costs = Direct costs + Indirect cost = $68,380,000 + 25,340,000 = $93,730,000
The flotation cost is the cost incurred by a publicly traded company when it issues new securities. We can calculate the flotation cost by dividing the total costs by the net funds raised.
Floating cost = Total Costs / Net Funds Raised
= $93,730,000 / $473,780,000
= .1978 or 19.78%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.