Asked by MORIAH BULLERMAN on May 01, 2024
Verified
In a Canadian IPO issue,the issuing company has incurred $12 million for the floatation costs and legal fees.The issue involves 75 million shares.As a firm commitment written deal,the underwriter agrees to buy the shares at $25 each and resells to the public at $27.50 per share.What will be the percentage of direct costs required in this deal?
A) 11.50%
B) 10.01%
C) 6.01%
D) 13.33%
Floatation Costs
Expenses incurred by a company in issuing new securities, including fees to underwriters, legal fees, and registration fees.
Firm Commitment
An agreement where an underwriter guarantees to buy and sell all securities from the issuing company at an agreed-upon price.
Underwriter
A financial specialist or institution that assesses and undertakes the risk of another entity, often seen in insurance and securities issuances.
- Determine the share of direct expenditures involved in IPOs and perceive the factors that dictate these expenditures.
- Grasp the concept of flotation costs and their impact on a company’s financial decisions.
Verified Answer
ZK
Zybrea KnightMay 06, 2024
Final Answer :
C
Explanation :
Direct costs in this deal would include the floatation costs and legal fees, which amount to $12 million. The total amount raised through the issue would be:
75 million shares x $25/share = $1.875 billion
The underwriter will buy the shares at $25 and resell to the public at $27.50, making a profit of $2.50 per share. The total amount the underwriter will earn through this deal would be:
75 million shares x $2.50/share = $187.5 million
Therefore, the percentage of direct costs required in this deal would be:
($12 million/$1.875 billion + $12 million) x 100% = 0.64 x 100% = 6.40%
Rounding off to two decimal places, the answer is option C - 6.01%.
75 million shares x $25/share = $1.875 billion
The underwriter will buy the shares at $25 and resell to the public at $27.50, making a profit of $2.50 per share. The total amount the underwriter will earn through this deal would be:
75 million shares x $2.50/share = $187.5 million
Therefore, the percentage of direct costs required in this deal would be:
($12 million/$1.875 billion + $12 million) x 100% = 0.64 x 100% = 6.40%
Rounding off to two decimal places, the answer is option C - 6.01%.
Learning Objectives
- Determine the share of direct expenditures involved in IPOs and perceive the factors that dictate these expenditures.
- Grasp the concept of flotation costs and their impact on a company’s financial decisions.