Douglass Trucking issued 120,000 shares of stock last week. The underwriters charged an 8.5 percent spread in exchange for agreeing to a firm commitment. The legal and accounting fees amounted to $395,000. The company incurred $70,000 in indirect costs. The offer price was $25 a share. Within the first half hour of trading, the stock price increased to $28 a share. What was the flotation cost as a percentage of the funds provided by investors?
(Hint: First find the gross proceeds of the offer by multiplying the number of shares issued by the offer price. Then sum up the legal and accounting fees, indirect costs and underwriter spread times gross proceeds to find total issuance cost. This total issuance cost divided by gross proceeds is flotation cost as a percentage of funds raised.)