question archive 1) You firm's stock price could go up by 20% or fall by 10% over the next year
1) You firm's stock price could go up by 20% or fall by 10% over the next year
Subject:FinancePrice: Bought3
1) You firm's stock price could go up by 20% or fall by 10% over the next year.
a. Use the 5-year government rate to find the price of a European call option on the stock with an exercise price $3 less than the current stock price with a maturity of 1 year (Use either the binomial or the risk-neutral method).
b. Ajax has 1,575,000 shares outstanding and plans to issue 90,000 warrants. Each warrant holder can purchase 3 new shares of stock. What is the value of the warrant? Assume the exercise price is $17 (the same as the call from part a).
c. Ajax decides to issue a bond with the warrants instead. Use your debt rate (Rd) as the yield for bonds without warrants. Assume the bonds are 10-year bonds with annual coupons. There are 80 warrants attached to each bond. Set the coupon rate so the total package sells for $1000.
d. What concerns should Ajax have about using warrants?
If any assumptions have been made, please indicate assumptions
