(b) price of RM35 and 2 years 9 months until expiration. Ali Baba's share is currently trading RM37 per share, and the volatility is 35 percent per annum. Treasury-Bill's securities that mature in one year yield a continuously compounded interest rate of 9 percent per annum. Allison quite interested in purchase a European call option on Ali Baba industry, with a strike i. Calculate the price of put and call option for Allison if d, = 0.5909 and d2 = 0.2409. ii. Despite of current market outlook, GMI bond has shown upward trend and Allison has interested to invest in the bond. The GMI bond per warrant package priced to sell at RM999. Each bond comes with 150 attachable warrants that gives the owner the right to buy at exercise price of RM35 per share. The value of a warrant has been estimated at RM2.50. The bonds mature in 25 years. Besides, Allison has 17,300 outstanding shares and the firm's value net of debt is RM890,900. If the interest rate is 11 percent, calculate the bond's annual coupon payment and gain from exercising a single warrant.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
We will apply the formula to find out the price of the call option and put the option using the data provided in the question. We will then solve the coupon payment using the coupon rate and the price of the bond. For finding out the gain we will first calculate the value of each share then we will deduct the price for exercising the single warrant.
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