Tuttle Buildings Inc

Multiple Choice

Tuttle Buildings Inc.has decided to go public by selling $5,000,000 of new common stock.The firm's investment bankers (underwriters) agreed to take a smaller fee now (6% of gross proceeds,versus their normal 10%) in exchange for a 1-year option to purchase an additional 200,000 shares at $5.00 per share.The investment bankers expect to exercise the option and purchase the 200,000 shares in exactly 1 year,when the stock price is forcasted to be $6.50 per share.However,there is a chance that the stock price will actually be $12.00 per share 1 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) $1,300,973
B) $1,369,446
C) $1,441,522
D) $1,517,391