Assume that the investment bankers required return

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Reference no: EM131025606

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.

Reference no: EM131025606

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