Problem 5-7 A company wants to raise $440 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 $69 per share, what would be the issue price to the public after underpricing? How many shares would the company need to sell? Note: Round Intermediate calculations to 2 decimal places. Round your answers to 2 decimal places. Enter "Number of shares" answer in millions. Issue price Number of shares million b. How much money will the investment banking syndicate earn on the sale? Note: Round Intermediate calculations to 2 decimal places. Enter your answer in millions rounded to 2 decimal places. investment bankers' revenue million
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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