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Tuttle Buildings Inc. Underwriting Compensation

Tuttle Buildings Inc. has decided to go public by selling $5,000,000 of new common stock. Its investment bankers agreed to take a smaller fee now (6% of gross proceeds versus their normal 10%) in exchange for a 1 year option to purchase an additional 200,000 shares at $5.00 per share. The investment bankers expect to exercise the option and purchase the 200,000 shares in exactly one year, when the stock price is forecasted to be $6.50 per share. However, there is a chance that the stock price will actually be $12.00 per share one year from now. If the $12 price occurs, what would the present value of the entire underwriting compensation be? Assume that the investment banker's required return on such arrangements is 15%, and ignore taxes.

A. $1,235,925
B. $1,300,973
C. $1,369,446
D. $1,441,522
E. $1,517,391

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The income to the investment banker is
1. The fee now which is ...

Solution Summary

The solution explains how to calculate the present value of the total underwriting compensation.