Flotation Cost

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Assignment Week 4
BUS401
December 12, 2011

Complete Study Problem 13-5 from the end of Chapter 13 of the text and submit to your instructor. Clearly label the calculation of the required ratios and solve using Excel. Use formulas to calculate the ratios and format the cells to insert a comma if there is more than three numbers. Round dollar amounts to the nearest whole dollar. Summarize your analysis in a concise management statement not to exceed 100 words.

13-5. (Flotation costs and issue size) D. Butler Inc. needs to raise $14 million. Assuming that the market price of the firm’s stock is $95, and flotation costs are 10 percent of the market price, how many shares would have to be issued? What is the dollar size of the issue? Market price of the firms stock $95

Flotation cost 10 percent of market price

Stock price is $95, so the flotation Costs are $9.50 (10% x $95) the firm receives $95 - 9.50 = $85.50 per share
Therefore, to raise $14 million, the firm should issue $14,000,000 / $85.50 = 163,743 shares. The dollar size of the issue = $95 x 163,743 = $15,555,585

Flotation cost is the cost that D. Butler would incur when ever it makes any offering of stocks or bonds. The flotation cost includes the cost of printing the formal documents used to record facts, pay the fees from the government, and other cost that is needed to run D. Butler Inc. The dollar size depending on the outcome will determine if the odds are high or low. To raise 14 million, D Butler Inc. can either size the issue by shares or by dollar amounts. To solve for the number of shares for the issue:

Divide the amount of money the company needs to raise 14,000,000 by the net price of the stock 85.50 (the price of the stock - 10 percent flotation costs) which equals 163,743 shares.

To solve for the dollar amount of the issue:

Multiply the number of shares 163,743 times the market price 95.50 for a total dollar amount of $15,555,556.
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