Tuttle Buildings Inc. has decided to go public by selling $5,000,000 of new common stock. Its
investment bankers 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 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