Suppose that you are trying to value an IPO of stock in a start-up in the RFID industry. Suppose its current liquidation value is estimated to be $6,000,000 and its debt worth $5,000,000. Based upon industry experience, you derive an average estimate of u=3 and d=0.25, and the risk-free rate is 4.5%.

(a) Using a one period binomial option pricing model, estimate its offer price assuming that 1,000,000 shares will be outstanding after the offer.

(b) What will the company get if the underwriter spread on this issue is 18% and it sells 500,000 shares in the offering?

(c) What would the price of a warrant on such stock be worth if it promised two shares of stock for every warrant with an exercise price of $5?