Its Negotiations with Its Investment Bankers, Patton Electronics Has Reached

question 15

Multiple Choice

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 sharePatton 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

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Definitions:

Strategic

Refers to a high-level plan or approach designed to achieve long-term or overall goals.

Biased Forecast

A forecast that consistently tends to overestimate or underestimate the actual value due to systematic errors.

Naive Approach

A forecasting technique that assumes that demand in the next period is equal to demand in the most recent period.

Time-series Model

A statistical model that analyzes a sequence of data points, typically measured at successive time intervals, to forecast future trends.