PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 21, Problem 16PS
Summary Introduction
To determine: Value of option warrants.
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Potter Industries Inc. has warrants outstanding that permit its holders to purchase 1 share of stock per warrant at a price of $18. (Refer to Chapter 18 for parts a, b, and c.)
a. Calculate the exercise value of Potter’s warrants if the common stock sells at each of the following prices: $18, $21, $25, and $70.
b. At what approximate price do you think the warrants would sell under each condition indicated in part a? What premium is implied in your price? Your answer will be a guess, but your prices and premiums should bear reasonable relationships to each other.
c. How would each of the following factors affect your estimates of the warrants’ prices and premiums in part b?
The life of the warrant is lengthened.
The expected variability (sp) in the stock’s price decreases.
The expected growth rate in the stock’s EPS increases.
The company announces the following change in dividend policy: Whereas it formerly paid no dividends, henceforth it will pay out all earnings as dividends.
d.…
Maese Industries Inc. has warrants outstanding that permit the holders to purchase 1
share of stock per warrant at a price of $25.
a. Calculate the exercise value of a warrant at each of the following common stock
prices: (1) $20, (2) $25, (3) $30, (4) $100. (Hint: A warrant’s exercise value is the
difference between the stock price and the purchase price specified by the warrant
if the warrant were to be exercised.)
b. Assume the firm’s stock now sells for $20 per share. The company wants to sell
some 20-year, $1,000 par value bonds with interest paid annually. Each bond will
have attached 50 warrants, each exercisable into 1 share of stock at an exercise
price of $25. The firm’s straight bonds yield 12%. Assume that each warrant will
have a market value of $3 when the stock sells at $20. What coupon interest rate,
and dollar coupon, must the company set on the bonds with warrants if they are
to clear the market? (Hint: The convertible bond should have an initial price
of $1,000.)
Maese Industries Inc. has warrants outstanding that permit the holders to purchase 1 share of stock per warrant at a price of $28.
a. Calculate the exercise value of a warrant at each of the following common stock prices: (1) $20, (2) $25, (3) $30, (4) $100. (Hint: A warrant's exercise
value is the difference between the stock price and the purchase price specified by the warrant if the warrant were to be exercised.) If your answer is
zero, enter "0". Round your answers to the nearest dollar.
(1) $20 $
0
(2) $25 $
0
(3) $30 $
(4) $100 $
2
72
b. Assume the firm's stock now sells for $20 per share. The company wants to sell some 20-year, $1,000 par value bonds with interest paid annually. Each
bond will have attached 75 warrants, each exercisable into 1 share of stock at an exercise price of $25. The firm's straight bonds yield 11%. Assume that
each warrant will have a market value of $2.5 when the stock sells at $20. What coupon interest rate must the company set on the bonds with…
Chapter 21 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 21 - Binomial model Over the coming year, Ragworts...Ch. 21 - Binomial model Imagine that Amazons stock price...Ch. 21 - Prob. 3PSCh. 21 - Binomial model Suppose a stock price can go up by...Ch. 21 - Prob. 6PSCh. 21 - Two-step binomial model Suppose that you have an...Ch. 21 - Prob. 8PSCh. 21 - Option delta a. Can the delta of a call option be...Ch. 21 - Option delta Suppose you construct an option hedge...Ch. 21 - BlackScholes model Use the BlackScholes formula to...
Ch. 21 - Option risk A call option is always riskier than...Ch. 21 - Option risk a. In Section 21-3, we calculated the...Ch. 21 - Prob. 16PSCh. 21 - Prob. 18PSCh. 21 - American options The price of Moria Mining stock...Ch. 21 - American options Suppose that you own an American...Ch. 21 - American options Recalculate the value of the...Ch. 21 - American options The current price of the stock of...Ch. 21 - American options Other things equal, which of...Ch. 21 - Option exercise Is it better to exercise a call...Ch. 21 - Option delta Use the put-call parity formula (see...Ch. 21 - Option delta Show how the option delta changes as...Ch. 21 - Dividends Your company has just awarded you a...Ch. 21 - Option risk Calculate and compare the risk (betas)...Ch. 21 - Option risk In Section 21-1, we used a simple...Ch. 21 - Prob. 30PS
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- Maese Industries Inc. has warrants outstanding that permit the holders to purchase 1 share of stock per warrant at a price of $21. a. Calculate the exercise value of a warrant at each of the following common stock prices: (1) $20, (2) $25, (3) $30, (4) $100. (Hint: A warrant's exercise value is the difference between the stock price and the purchase price specified by the warrant if the warrant were to be exercised.) If your answer is zero, enter "0". Round your answers to the nearest dollar. (1) $20 $ (2) $25 $ (3) $30 $ (4) $100$ b. Assume the firm's stock now sells for $20 per share. The company wants to sell some 20- year, $1,000 par value bonds with interest paid annually. Each bond will have attached 25 warrants, each exercisable into 1 share of stock at an exercise price of $25. The firm's straight bonds yield 12%. Assume that each warrant will have a market value of $3.25 when the stock sells at $20. What coupon interest rate must the company set on the bonds with warrants if…arrow_forwardMaese Industries Inc. has warrants outstanding that permit the holders to purchase 1 share of stock per warrant at a price of $29. Calculate the exercise value of a warrant at each of the following common stock prices: (1) $20, (2) $25, (3) $30, (4) $100. (Hint: A warrant's exercise value is the difference between the stock price and the purchase price specified by the warrant if the warrant were to be exercised.) If your answer is zero, enter "0". Round your answers to the nearest dollar. (1) $20 $ (2) $25 $ (3) $30 $ (4) $100 $arrow_forwardFrom the banker’s point of view, when the banker quotes a floating interest, in doingso, the banker is passing on the interest rate risk to the borrower.• What if the banker has to quote a fixed interest rate but his cost of funds are floating?In this case, the customer/borrower faces no risk but the banker does.• Example: As a Credit Officer bank you have agreed to provide a customer with a fixedrate, 3-month, RM 20 million loan 90 days from today. You had priced the loan at 12%annual interest rate.• The following quotes are available in the market.3-month KLIBOR = 9 %3-month KLIBOR futures = 90.0 (matures in 90 days) How would you protect yourself from a rise interest rates?arrow_forward
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