The Collins Co. has just gone public. Under a firm commitment agreement, Collins
ID: 2763500 • Letter: T
Question
The Collins Co. has just gone public. Under a firm commitment agreement, Collins received $32.90 for each of the 4.19 million shares sold. The initial offering price was $35.30 per share, and the stock rose to $42.80 per share in the first few minutes of trading. Collins paid $914,000 in legal and other direct costs and $268,000 in indirect costs. (Enter your answer as directed, but do not round intermediate calculations.)
What was the flotation cost as a percentage of funds raised? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
The Collins Co. has just gone public. Under a firm commitment agreement, Collins received $32.90 for each of the 4.19 million shares sold. The initial offering price was $35.30 per share, and the stock rose to $42.80 per share in the first few minutes of trading. Collins paid $914,000 in legal and other direct costs and $268,000 in indirect costs. (Enter your answer as directed, but do not round intermediate calculations.)
Explanation / Answer
We need to calculate the net amount raised and the costs associated with theoffer. The net amount raised is the number of shares offered times the pricereceived by the company, minus the costs associated with the offer, so:
Net amount raised = (4,190,000 shares)($32.90) – 914,000 – 268,000
Net amount raised = $136,669,000
The company received $136,669,000 from the share offering. This is theincremental amount of $ that the company will be able to spend on new investments and projects as a result of the issue
We just said that the company received $136,669,000 from the share offering.
Now, we can calculate the direct costs. Part of the direct costs are given in theproblem, but the company also had to pay the underwriters.The share was offered at $35.30 per share, and the company received $32.90 pershare. The difference, which is the underwriters spread, is also a direct cost.
The total direct costs were:
Total direct costs = $914,000 + ($35.30 – 32.90)(4,190,000 shares)
Total direct costs = $10,970,000
We are given part of the indirect costs in the problem. Another indirect cost isthe immediate price appreciation. The total indirect costs were:
Total indirect costs = $268,000 + ($42.80 – $35.30)(4,190,000 shares)
Total indirect costs = $31,693,000
This makes the total costs:
Total costs = $10,970,000+ $31,693,000
Total costs = $42,663,000
The floatation costs as a percentage of the amount raised is the total costdivided by the amount raised, so:
Floatation cost percentage = $42,663,000 /$136,669,000 = 31.22%
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