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The Bostitch Co. has just gone public. Under a firm commitment agreement, Bostitch received $32...

Question:

The Bostitch Co. has just gone public. Under a firm commitment agreement, Bostitch received $32 for each of the 4.1 million shares sold. The initial offering price was $34.40 per share, and the stock rose to $41 per share in the first few minutes of trading. Bostitch paid $905,000 in legal and other direct costs and $250,000 in indirect costs.

What was the flotation cost as a percentage of funds raised?

Flotation costs:

Flotation costs refer to the costs incurred on issuance of a stock or a bond to the public. It includes all costs of underwriting, legal charges and documentation charges relating to the issue.

Answer and Explanation:

Flotation cost as a percent of fund raised
= (Initial Offering price - Price received) / Initial Offering price x 100

Here,

Initial Offering price = $34.40

Price received = $32.00

So,

Flotation cost
= (34.40 - 32.00) / 34.40 x 100
= 6.98%


Learn more about this topic:

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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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