In 2006, Tim Hortons wanted to raise additional capital for its operations by going to the public
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Question:
To raise capital successfully in the public capital markets, the services of investment firms (as underwriters), lawyers, accountants, and others are required. The firm pays these experts for raising, or floating, the capital on their behalf. This reduces the proceeds received by the firm from the amount paid by the public. These flotation costs increase the cost of raising capital.
Out of the approximately $775 million worth of common equity sold to the public, the investment firms received fees of approximately $47 million. Other expenses incurred by the issue amounted to $12.25 million.
Therefore, the flotation costs of this issue were approximately 7.6 percent (59.25/775) of the price paid by the public. As the public based their expectation of a return on the price they paid, the flotation expenses increased Tim Hortons cost of the issue.
By the end of 2014 Tim Hortons had merged with Burger King and was bought by Restaurant Brands International (QSP on TSX).
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Related Book For
Financial and Managerial Accounting
ISBN: 978-0132497978
3rd Edition
Authors: Horngren, Harrison, Oliver
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