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

Question

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 under- pricing is 8 percent of the current stock price, and the spread is 7 percent 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

a) Net proceed to the firm per share = $75 x (1 - 8%) x (1 - 7%) = $64.17

No. of shares to sell = 500,000,000 / 64.17 = 7,791,803 shares

Issue Price to Public = 75 x (1 - 8%) = $69.00

b) Investment Banker will earn = 69 x 7,791,803 x 7% = $37,634,408.60

c) Underpricing isn't a cash flow. It is a cost to the firm in order to attract new investors.

Related Questions

Navigate

• Browse (All)
• Browse 7
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.