The Raven Co. has just gone public. Under a firm commitment agreement, Raven rec

Question

The Raven Co. has just gone public. Under a firm commitment agreement, Raven received $17.30 for each of the 15 million shares sold. The initial offering price was $21.00 per share, and the stock rose to $23.40 per share in the first few minutes of trading. Raven paid $540,000 in direct legal and other costs and $170,000 in indirect costs.

What was the flotation cost as a percentage of funds raised? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Floatiotion Cost _________%

The Raven Co. has just gone public. Under a firm commitment agreement, Raven received $17.30 for each of the 15 million shares sold. The initial offering price was $21.00 per share, and the stock rose to $23.40 per share in the first few minutes of trading. Raven paid $540,000 in direct legal and other costs and $170,000 in indirect costs.

Explanation / Answer

If you know meaning of "Firm Commitment" its very good and if not please go through under mentioned explanation:

DEFINITION OF 'FIRM COMMITMENT'

1. A lending institution's promise to enter into a loan agreement with a specific entity within a certain period of time.

2. An underwriter's agreement to assume all inventory risk and purchase all securities directly from the issuer for sale to the public at the price specified.

In a firm commitment, underwriters act as dealers and are responsible for any unsold shares. The dealer profits from the spread between the purchase price and the public offering price. Also known as a "firm commitment underwriting".

Solution:

In the the given question,

The Raven Co. will not receive anything in excess of $ 17.30 each shares even if the initial offering price is $ 21.00 or $ 23.40 since spread of $ 3.70 each Share (21.00-17.30) or $ 6.10 (23.40-17.30) will be earned by underwriter under the terms of "firm commitment underwriting".

Now, floatation cost involves underwriting expenses, brokerage and other administrative expenses.

The Raven Co. raised fund by Firm Commitment = $ 17.30 x 15 Million = $259,500,000

and incurred Floatation Cost = $540,000 + $170,000 (direct legal and other costs and in indirect cost)

= $710,000

Therefore % Floatation cost = Floatation Cost / Fund raised x 100

= $710,000 / $259,500,000 x 100

= .27 %

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