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, what would be the issue price to the public after underpricing? How many shares would the company need to sell?

b. How much money will the investment banking syndicate 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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