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Explanation:
The cost of each warrant = Value of the 4-year European call option on the stock
where N = number of shares outstanding
and M = Number of warrants issued
The cost of each warrant =
Total cost of warrants = USD $5.8920 \times 1\ \text{million} = \text{USD } 5.892\ \text{million}$
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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.