Stump, Inc. a technology firm in Prairie View, Texas, issues a $66 million IPO priced at $17 per share, and the offering price to the public is $22 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $350,000. The firm's stock price increases 15 percent on the first day. What is the firm's total cost of issuing the securities?

Question

Quizplus · Accepted Answer

The number of shares issued is calculated by dividing the total amount raised by the offering price to the public. Therefore, the number of shares issued is:

$66 million ÷ $22 per share = 3 million shares

The firm's legal fees, SEC registration fees, and other administrative costs of $350,000 are fixed costs, and they do not change with the number of shares issued. Thus, the total cost of issuing the securities is:

($350,000 + $66 million × 0.03) ÷ 0.85 = $25.25 million.

The division by 0.85 represents a 15% underwriting spread, which is the difference between the offering price to the public and the price paid to the company.