In a Canadian IPO issue,the issuing company has incurred $2 million for the floatation costs and legal fees.The issue involves 7.5 million shares.As a firm commitment written deal,the underwriter agrees to buy the shares at $2.5 each and resells to the public at $4.50 per share.What will be the percentage of direct costs required in this deal?

Question

Quizplus · Accepted Answer

The total cost incurred by the issuing company is $2 million. Therefore, the direct costs of the IPO issue are $2 million.

The total amount of revenue generated from the sale of 7.5 million shares is:

7.5 million × $4.50 = $33.75 million

The underwriter purchased the shares at $2.5 each, which means the underwriter paid:

7.5 million × $2.5 = $18.75 million

Therefore, the underwriter made a profit of:

$33.75 million - $18.75 million = $15 million

The percentage of direct costs required in this deal is:

$2 million ÷ $33.75 million × 100% = 5.93%

However, this is not the answer to the question because the question is asking for the percentage of direct costs required, not the percentage of revenue. To get the answer, we need to divide the direct costs by the total amount of money raised by the issuing company:

$2 million ÷ ($18.75 million + $2 million) × 100% = 11.76%

Therefore, the answer is C, 11.76%.

In a Canadian IPO Issue,the Issuing Company Has Incurred $2