The Wiley Oakley Co. has just gone public. Under a firm commitment agreement, Wi

Question

The Wiley Oakley Co. has just gone public. Under a firm commitment agreement, Wiley Oakley received $22.05 for each of the 6.69 million shares sold. The initial offeFind theg price was $23.90 per share, and the stock rose to $30.41 per share in the first few minutes of trading. Wiley Oakley paid $919,000 in legal and other direct costs and $194,000 in indirect costs. (Enter your answer as directed, but do not round intermediate calculations.) Required: 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).) Flotation cost percentage

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 = (6,690,000 shares)($22.05) – 919,000 – 194,000

Net amount raised = $146,401,500

The company received $146,401,500 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 $146,401,500 from the share offering.

Now, we can calculate the direct costs. Part of the direct costs are given in the problem, but the company also had to pay the underwriters.The share was offered at $23.90 per share, and the company received $22.05 pershare. The difference, which is the underwriters spread, is also a direct cost.

The total direct costs were:

Total direct costs = $919,000 + ($23.90 – 22.0)(4,190,000 shares)

Total direct costs = $13,295,500

We are given part of the indirect costs in the problem. Another indirect cost is the immediate price appreciation. The total indirect costs were:

Total indirect costs = $194,000 + ($30.41 – $23.90)(6,690,000 shares)

Total indirect costs = $43,745,900

This makes the total costs:

Total costs = $13,295,500+ $43,745,900

Total costs = $57,041,400

The floatation costs as a percentage of the amount raised is the total costdivided by the amount raised, so:

Floatation cost percentage = $57,041,400 /$146,401,500 = 38.96%

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