EBK CORPORATE FINANCE
EBK CORPORATE FINANCE
11th Edition
ISBN: 8220102798878
Author: Ross
Publisher: YUZU
bartleby

Concept explainers

Question
Book Icon
Chapter 24, Problem 16QP
Summary Introduction

To determine: Number of warrant, company should issue.

Warrant:

Warrant is given to the security holder those who purchase the shares. It is not the obligation of the share holder it’s a right of the share holder to purchase the share at a fixed price.

Expert Solution & Answer
Check Mark

Explanation of Solution

Formula to calculate the number of the warrants,

Presentvalueofliability=AW(CommonstockCommonstock+AW)×Call(Valueofstockmarket),$95

Where,

  • AW is the number of the warrant.
  • Call(S, E) is the call option.

Substitute $17,468,019.6 for the PV liability, $2,700,000 for the common stock, $88.89 for the value of the stock market.

17,468,019.6=(AW)[2,700,0002,700,000+AW]×Call($88.89,$95)AW=3,756,683

Working notes:

Calculate the present value of the liability,

Presentvalueofliability=Presentvalueoftheshare0.6(Periodtime)=$18,000,000e0.06(0.5)=$17,468,019.60

Calculate the value of the stock price,

Stockprice=MarketvalueoftheassetsCommomstock=$240,000,0002,700,000=$88.89

Calculate the value of the single warrant,

W=[AA+AW]×Call{S=(VA),E=EW}

Where,

  • A is the number of shares.
  • AW is the number of warrants.
  • Call(S, E) is the call option.
  • V is the value of the debt.
  • EW is the strike price of each debt.

W=[2,700,0002,700,000+AW]×Call{($240,000,0002,700,000),E=$95}=[2,700,0002,700,000+AW]×Call{($88.89),E=$95}

Since the firm must raise $17,468,019.60 as a result of the warrant issued, and AW×W must equal $17,468,019.60.

So,

$17,468,019.60=(AW)(W)$17,468,019.60=(AW)(2,700,000(2,700,000+AW))×Call($88.89,$95)

Calculate the value of the warrant by using the black schools, for the call option,

Calculate the D1 ,

D1=[In(SK)+(R+σ22)×tσ2×t]

Where,

  • S is the value of the stock.
  • K is the exercise price.
  • R is the risk rate.
  • T is the tenure of the option.
  • σ is the standard deviation.

Calculate D1,

D1=[In($88.89$95)+(.06+0.502)×.5(0.50×52)]=0.736

Calculate the D2,

D2=D1(σ×t2)=0.736(0.5×0.52)=0.611

Calculate the N(d1) ,

N(d1)=N(0.736)=0.27004

Calculate the N(d2) ,

N(d2)=N(0.611)=0.378162

Black scholes formula to calculate the value of one option,

C=Sx×N(D)K×e-Rt×N(D2)=($88.89)(0.27004)($95)×0.06(0.5)(0.378162)=$24.004$1.078=$22.92

Conclusion

Hence, the number of the warrants is 3,756,683.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Suppose that you are a U.S.-based importer of goods from the United Kingdom. You expect the value of the pound to increase against the U.S. dollar over the next 30 days. You will be making payment on a shipment of imported goods in 30 days and want to hedge your currency exposure. The U.S. risk-free rate is 5.5 percent, and the U.K. risk-free rate is 4.5 percent. These rates are expected to remain unchanged over the next month. The current spot rate is $1.90.  1.Move forward 10 days. The spot rate is $1.93. Interest rates are unchanged. Calculate the value of your forward position. Do not round intermediate calculations. Round your answer to 4 decimal places.
Don't solve. I mistakenly submitted blurr image please comment i will write values. please dont Solve with incorrect values otherwise unhelpful.
The  image is blurr please comment i will write values. please dont Solve with incorrect values otherwise unhelpful.

Chapter 24 Solutions

EBK CORPORATE FINANCE

Knowledge Booster
Background pattern image
Finance
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Text book image
Financial Reporting, Financial Statement Analysis...
Finance
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:Cengage Learning
Text book image
EBK CFIN
Finance
ISBN:9781337671743
Author:BESLEY
Publisher:CENGAGE LEARNING - CONSIGNMENT
Text book image
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Text book image
Financial Accounting Intro Concepts Meth/Uses
Finance
ISBN:9781285595047
Author:Weil
Publisher:Cengage