Moonscape has just completed an initial public offering. The firm sold 2 million shares at an...

Question:

Moonscape has just completed an initial public offering. The firm sold 2 million shares at an offer price of $8 per share. The underwriting spread was $0.40 a share. The price of the stock closed at $14.00 per share at the end of the first day of trading. The firm incurred $200,0000 in legal, administrative, and other costs.

What were the flotation costs as a fraction of the funds raised?

Flotation Cost:

Flotation cost refers to the total cost incurred by a company in offering its securities- shares to the public. It includes expenses such as underwriting fees, legal fees and registration fees.

Answer and Explanation:

Funds Raised = shares issued * offer price per share = 2 million* $8 = $16 million.

Cost percentage = (Underwriting cost + Underpricing + other direct cost )/ Funds Raised = (2 million* $0.40 + 2 million *($14 - $8) + $200000 )/ $16 million = 0.925 or 92.5%


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Cost of Capital: Flotation Cost, NPV & Internal Equity

from Corporate Finance: Help & Review

Chapter 3 / Lesson 18
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