A Firm Desires to Sell Stock to the Public

question 17

Essay

A firm desires to sell stock to the public. The underwriter charges $0.45 million in fees and offers to buy 6 million shares from the firm at a price of $35 per share. In addition, registration and audit fees total $130,000, and marketing and miscellaneous fees add up to another $75,000. The underwriter expects to earn gross proceeds per share of $38. What is the issuing firm's out-of-pocket dollar transaction cost to issue the stock? Immediately after the stock was issued, the stock price rose to $40. What is the issuing firm's opportunity cost? What is the total issuance cost, including opportunity costs, as a percentage of the total funds available to the issuing firm?

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Definitions:

Subsidiary Loss

Financial losses incurred by a subsidiary, which may impact the financial position and results of the parent company.

Deferred Tax Liability

A tax obligation due in the future for income that has been recognized in the financial statements before it is taxable.

Inventory

The raw materials, work-in-process products, and finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale.

Accounts Payable

Liabilities of a business representing amounts owed to creditors for goods and services received but not yet paid for.