Question
A firm aims to issue common stock to raise $5 million. Youre the underwriter in a firm that specializes in issuing stock. You calculate that
A firm aims to issue common stock to raise $5 million. Youre the underwriter in a firm that specializes in issuing stock. You calculate that if the firm issues common stock, the stock will trade for $130 a piece, and the required return by the market is 14%. The expected dividend that the stock will pay is $15, and it is projected to increase by 1% every year. Your management asks you to set an underwriting fee.
1) How much underwriting per share will you charge?
2) How does the underwriting fee change if the dividend increases?
3) How does the underwriting fee change if the required return increases?
4) How does the underwriting fee change if the annual increase in return increases?
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