Question: Basic Buildings Inc. decided to go public with a $5,000,000 new equity issue at the beginning of January 1999. Its investment bankers agreed to take

  1. Basic Buildings Inc. decided to go public with a $5,000,000 new equity issue at the beginning of January 1999. Its investment bankers agreed to take a smaller fee now (4 percent of the proceeds) in addition to a 1-year option to purchase an additional 200,000 shares of the company at $5.00 per share. The investment-banking firm expects to exercise its option and purchase the 200,000 shares in exactly one year's time when the stock price is expected to be $13.50 per share. 

  3. What is the value of the option to the investment banker?

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