In Its Negotiations with Its Investment Bankers, Patton Electronics Has

Multiple Choice

In its negotiations with its investment bankers, Patton Electronics has reached an agreement whereby the investment bankers receive a smaller fee now (6% of gross proceeds versus their normal 10%) but also receive a 1-year option to purchase an additional 200,000 shares at $5.00 per share.Patton will go public by selling $5,000,000 of new common stock.The investment bankers expect to exercise the option and purchase the 200,000 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 value of the entire underwriting compensation be? Assume that the investment banker's required return on such arrangements is 15%, and ignore taxes.

A) $1,235,925
B) $1,300,973
C) $1,369,446
D) $1,441,522
E) $1,517,391