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?

Question

Quizplus · Accepted Answer

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%.

In a Canadian IPO Issue,the Issuing Company Has Incurred $12