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13 January, 11:33

The Raven Co. has just gone public. Under a firm commitment agreement, Raven received $18.50 for each of the 20 million shares sold. The initial offering price was $22.80 per share, and the stock rose to $24.60 per share in the first few minutes of trading. Raven paid $580,000 in direct legal and other costs and $190,000 in indirect costs. What was the flotation cost as a percentage of funds raised? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.) Flotation cost %

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  1. 13 January, 12:01
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    46.79%

    Explanation:

    Net amount raised = Sale Proceeds - Direct Legal Costs - Indirect Costs

    Net amount raised = ($18.50 x $20,000,000) - $580,000 - $190,000

    Net amount raised = $370,000,000 - $770,000

    Net amount raised = $369,230,000

    Share offered at price = $22.80 per share

    Amount received per share = $18.50

    Underwriting spread = $22.80 - $18.50 = $4.30 per share

    Total underwriting spread = Underwriting spread x no. of shares offered

    Total underwriting spread = $4.30 x 20,000,000

    Total underwriting spread = $86,000,000

    Direct cost = Total underwriting spread + Direct Legal Costs

    Direct cost = $86,000,000 + $580,000

    Direct cost = $86,580,000

    Indirect cost = Indirect cost + Total underwriting spread

    Indirect cost = $190,000 + ($22.80 - $18.50) x $20,000,000

    Indirect cost = $190,000 + $86,000,000

    Indirect cost = $86,190,000

    Total Debt Capital = Direct Cost + Indirect Cost

    Total Debt Capital = $86,580,000 + $86,190,000

    Total Debt Capital = $172,770,000

    Flotation cost % = Total Debt Capital / Equity Capital raised

    Flotation cost % = $172,770,000 / $369,230,000 x 100

    Flotation cost % = 46.79%
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