TelAmeriCorp went public five years ago with an issuance of 5 million shares whi

ID: 2778518 • Letter: T

Question

TelAmeriCorp went public five years ago with an issuance of 5 million shares which, as of yesterday, were trading at $51.39 per share. They are looking to raise capital to start up a chain of brewpubs in the Rancho Cucamonga area by issuing an additional 1.3 million shares tomorrow in a Seasoned Equity Offering (SEO).

Management expects the current publicly traded shares to drop 2.5% at tomorrow's offering and remain at that price after the offering. However their investment bank, hoping for a fully subscribed offering, has suggested an offer price of $49.51 for those investors allocated shares from the SEO (i.e. there will likely be underpricing). The investment banker intends to charge a 7% spread for a firm commitment underwriting of the issue and $250,000 in legal and registration fees. The management team also estimates that at least one month's worth of the CFO's available man-hours were dedicated to preparing the offering and the CFO currently earns $120,000 per year.

What is the total dollar amount of expenses (direct and indirect) associated with TelAmeriCorp's SEO in millions?

If possible, please explain step by step when coming up with the answer

Explanation / Answer

Calculation of expenses associated with TelAmeriCorp's SEO:

Underwriting Charges = 1,300,000 Shares * $49.51 * 7%

$ 4,505,410

Add: legal and registration fees

$ 250,000

Add: one month's worth of the CFO's available man-hours (120000/12)

$ 10,000

Total expenses associated with TelAmeriCorp's SEO

$ 4,765,410