Calculating Costs of Issuing Stock Turbo Technology Corp. recently went public w

Question

Calculating Costs of Issuing Stock Turbo Technology Corp. recently went public with an initial public offering of 3.17 million shares of stock. The underwriter used a firm commitment offering in which the net proceeds was $8.35 per share and the underwriter's spread was 5 percent of the gross proceeds. Turbo also paid legal and other administrative costs of $370,000 for the IPO. Calculate the gross proceeds per share received by Turbo from the sale of the 3.17 million shares of stock.

$8.35

$8.91

$8.79

$8.47

Explanation / Answer

The gross proceeds per share are calculated as follows.

Let X be the gross proceeds per share.

Underwriter’s commission is 5% deducted from it.

Now, calculation would be …

Gross proceeds – Underwriter’s commission – Administrative costs = Net proceeds

X – 0.05X – ($370,000 / 3,170,000) = $8.35

0.95X -0.1167 = $8.35

0.95X = $8.47

X = $8.47 / 0.95

= $8.91.

Therefore, gross proceed per share is $8.91.

Note: It is assumed that underwriter's commission is deducted first than administrative expenses.

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