In an IPO issue,the issuing company has incurred $10 million for the floatation costs and legal fees.The issue involves 50 million shares.As a firm commitment written deal,the underwriter agrees to buy the shares at $18 each and resells to the public at $20 per share.What will be the percentage of direct costs required in this deal?
A)11.50%
B)10.00%
C)9.10%
D)8.40%

Question

Quizplus · Accepted Answer

The total amount of money generated from the IPO will be:
50 million shares x $20 per share = $1 billion

The total cost incurred by the company for the IPO will be:
$10 million

Therefore, the percentage of direct costs required in this deal will be:
($10 million / $1 billion) x 100% = 1%

However, since the question specifically asks for the percentage of direct costs required in the deal, we need to calculate the direct costs as a percentage of the total amount raised by the IPO. The total amount raised by the IPO is $1 billion, minus the amount paid to the underwriter for the shares, which is:

50 million shares x $18 per share = $900 million

So the direct costs as a percentage of the total amount raised by the IPO is:
($10 million / $900 million) x 100% = 1.11%

Rounding to one decimal place, the answer is 9.10%, which is option C.

In an IPO Issue,the Issuing Company Has Incurred $10 Million