Question
Problem #4: In its negotiations with its investment bankers, ELR Inc. has reached an agreement whereby the investment bankers receive a smaller fee now (6.5%
Problem #4: In its negotiations with its investment bankers, ELR Inc. has reached an agreement whereby the investment bankers receive a smaller fee now (6.5% of gross proceeds versus their normal 10%) but also receive a 1-year option to purchase an additional 125,000 shares at $12.00 per share. It will go public by selling $10,000,000 of new common stock. The investment bankers expect to exercise the option and purchase the shares in exactly one year, when the stock price is forecasted to be $17.00 per share. However, there is a chance that the stock price will actually be $13.00 per share one year from now. If the $17 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 18%, and ignore taxes.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started