5.7 A company wants to raise $500 million in a new stock issue. Its investment b

Question

5.7 A company wants to raise $500 million in a new stock issue. Its investment banker indicates that the sale of new stock will require 8 percent underpricing and a 7 percent spread. (Hint: the underpricing is 8 percent of the current stock price, and the spread is 7percent of the issue price.)

a. Assuming the company’s stock price does not change from its cur-rent price of $75 per share, how many shares must the company sell and at what price to the public?

b. How much money will the investment banking syndicates earn on the sale?

c. Is the 8 percent underpricing a cash flow? Is it a cost? If so, to whom?

Explanation / Answer

Details Amt $ Current Stock Price per share 75 Underpricing @8% per share 6.00 Offer Price per share 69.00 Underwriter's spread @7% per share on isuue price = 4.83 Net Proceeds to company per share 64.17 Funds to be raised = $ 500,000,000 No of shares to be issued           7,791,803 a So the company must sell 7,791,803 shares to public @ $69 per share b Investment banking earning @$4.83/share $    37,634,409 c Underpricing is a cost and is borne by the issuing company

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