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25 August, 14:14

Cross Country Movers has just gone public. Under a firm commitment agreement, the firm received $19.84 for each of the 2.12 million shares sold. The initial offering price was $24.40 per share, and the stock rose to $25 per share in the first few minutes of trading. The company paid $626,000 in legal and other direct costs and $105,000 in indirect costs. What was the flotation cost as a percentage of the funds raised?

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  1. 25 August, 14:24
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    = $11,670,200 / $41,329,800 x 100 = 28.24%

    Explanation:

    The question is to compute the flotation cost of the funds raised by Cross Country Movers after going public. Furthermore, it should be presented as a percentage.

    The formula therefore, is = Total Direct Costs / Net Amount raised x 100

    Step 1: Total Direct Costs

    = Direct Costs (legal and others) + Indirect costs + (Initial Offering Price - the amount received for each share x total shares sold) + (Price rise in stock per share - the initial offering price per share x total shares sold)

    = $626,000 + $105,000 + 9,667,200‬ + 1,272,000‬ = $11,670,200

    Step 2: Net Amount Raised

    = Amount recieved per share x total shares - Direct and indirect costs

    = $19.84 x 2,120,000 shares - $626,000 + $105,000

    = 42,060,800‬ - 731,000‬ = $41,329,800

    Step 3: Floatation Cost in Percentage

    = $11,670,200 / $41,329,800 x 100 = 28.24%
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