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2.75%

3.42%

Source: Inmoo Lee, Scott Lochhead, Jay Ritter, and Quanshui Zhao, "The Costs of Raising Capital," Journal of Financial Research 19 (Spring 1996).

Source: Inmoo Lee, Scott Lochhead, Jay Ritter, and Quanshui Zhao, "The Costs of Raising Capital," Journal of Financial Research 19 (Spring 1996).

Ross et al.: Fundamentals I VI. Cost of Capital and I 16. Raising Capital I I © The McGraw-Hill of Corporate Finance, Sixth Long-Term Financial Companies, 2002

Edition, Alternate Edition Policy

546 PART SIX Cost of Capital and Long-Term Financial Policy

Even though the IPO raised a gross sum of $7.15 million, Multicom got to keep less than $6 million after expenses. The largest cost was the underwriter spread. Multicom sold each of the 1.1 million shares to the underwriters for $5.98, and the underwriters in turn sold to the public for $6.50 each. Thus, of the $7.15 million investors paid for the shares, Multicom received only about $6.6 million. In addition, Multicom paid $145,000 to the underwriters to defray expenses incurred.

But wait, there's more. Multicom also spent $57,590 on fees to the Securities and Exchange Commission, along with exchange and listing fees. In addition, as a direct result of the public offering, Multicom spent $100,000 for insurance for directors and officers, $150,000 on accounting to obtain the necessary audits, $10,000 for a transfer agent to physically transfer the shares and maintain a list of shareholders, $75,000 for printing and engraving expenses, $200,000 for legal fees and expenses, and, finally, $12,049 for miscellaneous expenses.

As Multicom's outlays show, an IPO can be a costly undertaking! In the end, Multi-com's expenses totaled $1,321,639, of which $717,000 went to the underwriters and $604,639 went to other parties. The total cost to Multicom was 18.5 percent of the issue proceeds. Still, the company may have gotten off cheap at that price. As of December 31, 1996, Multicom's stock closed at $1.625, never having traded for higher than $7.25 a share for the year.

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