Deep Hollow Oil issued 135,000 shares of stock last week. The underwriters charged a spread of 8.05 percent in exchange for agreeing to a firm commitment. The legal and accounting fees amounted to $418,000 and the company incurred $48,000 in indirect costs. The offer price was $33 a share. Within the first hour of trading, the stock price increased to $36 a share. What was the flotation cost as a percentage of the funds raised?

Question

Business

Gavyn Christian

2 April, 08:40

Deep Hollow Oil issued 135,000 shares of stock last week. The underwriters charged a spread of 8.05 percent in exchange for agreeing to a firm commitment. The legal and accounting fees amounted to $418,000 and the company incurred $48,000 in indirect costs. The offer price was $33 a share. Within the first hour of trading, the stock price increased to $36 a share. What was the flotation cost as a percentage of the funds raised?

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Reginald Cox · Answer 1

Answer: flotation cost percentage = 16.97%

Explanation:

Flotation costs are necessary costs incurred by the company in the process of issuing shares. Floating costs include costs like underwriters fee, legal fees etc.

underwriters fee = 135000 x $33 x 8.05% = $358627.50

floating costs = 358627.50 + 418000 + 48000 = $ 824627.50

funds raised = 135000 x $36 = $4860000

flotation cost percentage = 824627.50/4860000

flotation cost percentage = 0.16967644 x 100 = 16.97%