The Green Hills Co. has just gone public. Under a firm commitment agreement, Gre

Question

The Green Hills Co. has just gone public. Under a firm commitment agreement, Green Hills received $17.67 for each of the 15 million shares sold. The initial offering price was $19.00 per share, and the stock rose to $23.18 per share in the first few minutes of trading. Green Hills paid $900,000 in direct legal and other costs and $320,000 in indirect costs.

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

Explanation / Answer

Net amount raised = (15,000,000 shares)($17.67) – 900,000 – 320,000 = $ 263,830,000

The company received $263,830,000 from the share offer.

Now, we can calculate the direct costs.

Part of the direct costs is given in the problem, but the company also had to pay the underwriters.

The share was offered at $19 per share, and the company received $17.67 per share. The difference, which is the underwriters spread, is also a direct cost.

The total direct costs were:

Total direct costs = $900,000 + ($19 – 17.67)(15,000,000 shares) = $ 20,850,000

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

Total indirect costs = $320,000 + ($23.18-19)(15,000,000shares) = $63,020,000

This makes the total costs = $ 20,850,000 + 63,020,000 = $83,870,000

The flotation costs as a percentage of the amount raised isthe total cost divided by the amount raised, so

Flotation cost percentage = $83870000/$263,830,000 = 0.3178, or 31.78%

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