391 Words2 Pages

Basic Buildings Inc. has decided to go public with a $5,000,000 new equity issue. Its investment bankers agreed to take a smaller fee now (6 percent of par value versus 10 percent) in exchange for a 1-year option to purchase an additional 200,000 shares of the company at $5.00 per share. The investment banking firm expects to exercise its option and purchase the 200,000 shares in exactly one year's time when the stock price is expected to be $6.50 per share. However, if the stock price is actually $12.00 per share one year from now, what is the present value of the entire underwriting agreement to the investment banker? Assume that the investment banker's required return on such arrangements is 15 percent and ignore any tax considerations.
One year from now the gain to the banker from the shares is 12-5=$7 per share and total is $7 × 200,000= $1,400,000.
The present value is $1,400,000/(1.15) = $1,217,391.
In addition the banker’s fee now is:
5,000,000 × 6%= $300,000.
The total amount is $1,517,391
|13. Tuttle Buildings Inc. has decided to go public by selling $6,000,000 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 250,000 shares at $7.00 per share. The |
|Investment bankers expect to exercise the option and purchase the 250,000 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

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