The Green Hills Co. has just gone public. Under a firm commitment agreement, Gre
ID: 2776279 • Letter: T
Question
The Green Hills Co. has just gone public. Under a firm commitment agreement, Green Hills received $26.04 for each of the 7 million shares sold. The initial offering price was $28 per share, and the stock rose to $32.30 per share in the first few minutes of trading. Green Hills paid $1,850,000 in direct legal and other costs and $370,000 in indirect costs.
What was the flotation cost as a percentage of funds raised? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
What was the flotation cost as a percentage of funds raised? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Answer: It cost the company $1.96/share (28-26.04) in underwriting cost, times 7 million shares = $13720000. Add the legal costs of $1850,000 plus the indirect costs of $370,000 for a total cost of $15940000.
The company received proceeds of $26.04 x 7000,000 = $182280,000
Flotation cost as a percentage: 15940000/182280000 = 0.08745 = 8.745%
The fact that the stock price rose to $32.30 within minutes after trading started does not benefit the company directly in any way and therefore does not affect our calculation. That price increase went only to the IPO investors.