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Explanation:
The value of a warrant is adjusted from the value of an equivalent call option to account for the dilution effect when warrants are exercised and new shares are issued. The formula for the cost of a warrant is: Warrant Value = (N / (N + M)) * Call Option Value Where:
Warrant Value = (20 / (20 + 1)) * 6.1867 Warrant Value = (20 / 21) * 6.1867 = 0.95238 * 6.1867 ≈ USD 5.892.
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Q.58 A company with 20 million shares worth $50 each is considering issuing 1 million warrants, each giving the holder the right to buy one share with a strike price of $75 in 4 years. The interest rate is 5 percent per annum, and the volatility is 25 percent per year. The company pays no dividends. The value of a 4-year European call option on the stock is USD 6.1867. Assuming the market perceives no benefits from the warrant issue, what is the cost of issuing the warrants?
A
USD 5.892.
B
USD 5.295.
C
USD 5.179.
D
USD 5.340.