Problem:
The Collins Co. has just gone public. Under a firm commitment agreement, Collins received $20.56 for each of the 7.5 million shares sold. The initial offering price was $22 per share, and the stock rose to $26 per share in the first few minutes of trading. Collins paid $1,200,000 in legal and other direct costs and $250,000 in indirect costs.
Required:
Question: What was the flotation cost as a percentage of funds raised?
Note: Provide support for rationale.