l. What are the direct and indirect costs of an IPO?
Randy’s, a family-owned restaurant chain operating in Alabama, has grown to the point that expansion throughout the entire Southeast is feasible. The proposed expansion would require the firm to raise about $18.3 million in new capital. Because Randy’s currently has a debt ratio of 50% and because family members already have all their personal wealth invested in the company, the family would like to sell common stock to the public to raise the $18.3 million. However, the family wants to retain voting control. You have been asked to brief family members on the issues involved by answering the following questions:
Direct cost includes:
Underwriting commission- The company has to pay a specific fee to an underwriter for selling the securities which a company has offered in the market.
Legal fee- The company has to pay a fee to the lawyer for providing his legal assistance in performing various compliances of the company as the SEC has considered mandatory.
Audit fee- The company has to pay a required fee to the auditor for performing annual audit of the company.
Registration fee- It includes the fee paid to the securities and commission exchange (SEC) for registration of new securities issued by the company.
Listing fee- It includes fee paid to a recognized stock exchange for listing of new securities of the company.
Indirect cost includes:
Restructuring cost- Restructuring cost includes the cost to set up the required departments and implementation of a new accounting and control system before issuing new securities.
Difference in the closing price and offer price- It includes the loss incurred by a company because of the difference in closing price and offer price of the security on the first day of trading.
Direct cost includes the underwriting commission, legal fee to lawyer, audit fee to an auditor, registration fee to SEC and listing fee to stock exchange borne by the firm while making an offer.
Indirect cost includes the restructuring cost incurred before making an offer and cost borne by the firm due to the difference in offering price and closing price of securities on the first day of trading.