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Superman Enterprises has just completed an initial public offering. The firm sold 800,000 new shares (the...

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Finance

Superman Enterprises has just completed an initial publicoffering. The firm sold 800,000 new shares (the primary offering).In addition, existing shareholders sold 325,000 shares (thesecondary issue). The new shares were offered to the public at$14.50 per share and underwriters received a spread of $1.21/share.The legal, administrative, and other costs were $175,000 and weresplit proportionately between the company and the sellingstockholders. The amounts a company receive is $10632000. Supposethat on the first day of trading, the price of superman's stock is$18/share. The cost to the firm from the underpricing is $2800000.So, what are the total costs of the issue to the firm as apercentage of the funds raised? Answer is 33.56+-0.03. Please writedown the details calculation. Thank you!

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Cost of Funds raised to company
Underwriting spread (800000*1.21) 968000
legal, administrative, and other costs [175000*800000/1125000] 124444
Cost of underpricing 2800000
Total cost of issue to firm 3892444

Amount of funds raised =Issue price *number of shares offered by firm

                              = 14.50*800000

                                = 11600000

total costs of the issue to the firm as a percentage of the funds raised = Total cost of issue to firm/Amount of funds raised

        = 3892444/11600000

            = 33.56%

**Total shares for allocation of Legal, administrative, and other costs between company and shareholders = 800000+325000 = 1125000 shares
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