Question: Harmony, Inc. recently issued convertible debt that has five years to maturity. The conversion price on the debt is $30. If the bondholders were to

Harmony, Inc. recently issued convertible debt that has five years to maturity. The conversion price on the debt is $30. If the bondholders were to convert their debt into equity, Harmony would have to issue 1,000,000 new shares. In conjunction with this debt issue, Harmony purchased a call option with an exercise price of $30 on 1,000,000 shares. Additionally, Harmony sold warrants on 300,000 shares of their stock with an exercise price of $45.

a. What is the purpose of Harmony purchasing the call option?

b. As an analyst, what range do you think that Harmony’s price will fall within over the next five years? Why?

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