The Ajax Corporation Has Received a Firm Commitment from Its

question 79

Essay

The Ajax Corporation has received a firm commitment from its underwriter to purchase 1 million shares of stock that will be marketed to the general public at $23 per share.The underwriter's spread is $1.90 per share and the issuing firm will pay an additional $1.65 million in legal and other fees.The issue was fully sold on the first day and the stock closed at $27.50 on that day.Calculate both the direct expense of issuance and the indirect (i.e., underpricing) expense.What % of the market value of the shares is represented by these costs?

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Definitions:

Break-Even Point

The financial point at which total revenues equal total costs, resulting in no net profit or loss.

Variable Costs

Charges that directly correlate with the volume of production or sales, such as direct labor and materials required for production.

Fixed Costs

These are business expenses that remain the same regardless of the level of production or sales, such as rent or salaries.

Break-Even Point

The level of sales at which total revenues equal total expenses, resulting in neither profit nor loss.