A firm has 100,000 shares of stock outstanding priced at $35 per share. The firm has no debt and does not pay a dividend. To raise more capital, it plans to issue 10,000 warrants, each allowing for the purchase of one share of stock at a price of $50. The warrants are European-style and expire in five years. The standard

A firm has 100,000 shares of stock outstanding priced at $35 per share. The firm has no debt and does not pay a dividend. To raise more capital, it plans to issue 10,000 warrants, each allowing for the purchase of one share of stock at a price of $50. The warrants are European-style and expire in five years. The standard deviation of the firm's common stock is 34 percent, and the continuously compounded, five-year risk-free rate is 5.2 percent.
a. Estimate the fair value of the warrants, first using the relevant information to calculate the Black-Scholes value of an analogous call option.
b. Determine the stock price at expiration, assuming the warrants are exercised if the value of the firm is at least $5,200,000.
c. Using the information in Parts a and b about initial and terminal warrant and stock prices, discuss the relative merits of these two ways of making an equity investment in the firm.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...

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Related Book For answer-question

Investment Analysis and Portfolio Management

10th Edition

Authors: Frank K. Reilly, Keith C. Brown

ISBN: 978-0538482387