Suppose that you are trying to value an IPO of a start-up in oil company called Alfa Romeo. The firms current book value is $1356 million. The company also has bank debt with face value of $900 million that was issued 5 years ago with yield of 12% and time to maturity of 15 years (so this debt is due in ten years at the time of IPO). Bonds with similar risk profile currently yield 15% per year while the risk-free rate is 3% per year. Your investigation of the oil industry indicates that about half the firms that attempt a public offering end up liquidated within five years. A few successful businesses, however, have managed to generate a sustainable profit stream after a few years of operations. You summarize your findings as follows. The average IPO firm in the industry has market value of equity of $1,100 million, book value of assets of $1,500 million, and debt to equity ratio (calculated using book values) of 0.6. Ten years after the IPO, the average market capitalization (i.e., market value of equity) for firms still on the market is $10,000 million, while those firms that were liquidated have the average liquidation value of 300 million.

-Using a binomial option pricing model, estimate GoDeep s offer price assuming that 7 million shares will be outstanding after the offer.

-How much money will the company raise if the underwriter spread on this issue is 8% and its sells 5 million shares in the offering?