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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

#### Solution Preview

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.

\$2.19