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 7 percent of the issue price.)
a. Assuming the company’s stock price does not change from its current 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?
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