Question

5 years after IPO, S&S Air is planning to raise fresh equity capital by selling a large new issue of common stock. S&S Air is currently a publicly traded corporation, and it is trying to choose between an underwritten cash offer and a rights offering (not underwritten) to current shareholders. S&S Air management is interested in minimizing the selling costs and has asked you for advice on the choice of issue methods. What is your recommendation and why?

Answer 1

Answer:

Underwritten cash offer is preferred over the right issue.

Explanation:

The amount that the company spends under the options are presented below as:

Option One: Underwritten cash offer spent by the company

Particulars                                     Amount ($)

Underwriting fee                                  7%

Legal fees and expenses              1800000

SEC registration fees                      12000

Other filing fees                              15000

Other expenses related to IPO      110000

Transfer agent fees                      6500

Engraving expenses                      520000

NASDAQ listing fees                     100000

Total                                             2563500

Option 2: Right shares

Particulars                                        Amount $

Legal fees and expenses                 1800000

SEC registration fees                         12000

Other filing fees                                 15000

Other expenses related to IPO         110000

Transfer agent fees                         6500

Engraving expenses                         520000

NASDAQ listing fees                         100000

                                                               2563500

Thus we can see that in underwritten cash offer, the company has to pay 7 percent additionally of the initial public offerings when compared to the issue of the right shares. But however at present as the company is short of funds, opting for the right issues is not recommended.

Therefore by marginal costing, the additional benefits when underwritten cash offer is much more as compared to the underwriting fees of 7 percent as additional cost.

Hence, underwritten cash offer is preferred over the right issue.