Is a warrant more similar to a call option or a put option

Assignment Help Financial Management
Reference no: EM131027186

Company Z issued bonds with detachable warrants several years ago.   Each warrant allows the holder to purchase one share of stock at $30 per share.    The stock has a beta of 1.3.

a. Calculate the exercise value of the warrants if the price of the underlying stock is $35.

b. How much would an investor likely be willing to pay for the warrant over and above its exercise value? Why?

c. Would the investor likely be willing to pay more or less for the warrant if the stock had a beta of 1.0? Why?

d. Is a warrant more similar to a call option or a put option? Why?

e. Why might an investor prefer to buy warrants rather than the underlying stock?

Reference no: EM131027186

Questions Cloud

Capital asset pricing model-dividend valuation model : Eaton Electronic Company’s treasurer uses both the capital asset pricing model and the dividend valuation model to compute the cost of common equity (also referred to as the required rate of return for common equity). Assume: Rf = 6 % Km = 9 % β = 1...
The fair present value of the treasury security : Explain what a STRIP is. The total sale proceeds from selling the stepped components of a Treasury security can sometimes be greater than the fair present value of the Treasury security. Why might this happen?
Would increase the speed of bottling and save money : The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $72,000. The annual cash flows have the following projections. Use Appendix B and App..
Calculate the weighted cost of each source of capital : Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 30 percent. Northwest’s treasurer is trying to determine the corporation’s current weighted average cost of capital in o..
Is a warrant more similar to a call option or a put option : Company Z issued bonds with detachable warrants several years ago.   Each warrant allows the holder to purchase one share of stock at $30 per share.    The stock has a beta of 1.3.  Calculate the exercise value of the warrants if the price of the und..
Estimates that net cash flows for the acquired company : Company X wants to acquire another similar company. It estimates that net cash flows for the acquired company will be $8,500,000 per year for 10 years. The cost is $50,000,000. The company's cost of capital is 10 percent. Should the company go ahead ..
Commercial banks alleviate the problem of liquidity risk : How do commercial banks alleviate the problem of liquidity risk that investors would face if they were to directly loan funds to individuals and corporations?
Project earnings and dividends for the next year : Justin Cement Company has had the following pattern of earnings per share over the last five years: Year Earnings Per Share 2006 $ 11.00 2007 11.55 2008 12.13 2009 12.74 2010 13.38 The earnings per share have grown at a constant rate (on a rounded ba..
Compute the price of ecology labs common stock : Ecology Labs, Inc., will pay a dividend of $3.90 per share in the next 12 months (D1). The required rate of return (Ke) is 22 percent and the constant growth rate is 10 percent. (Each question is independent of the others.) a. Compute the price of Ec..

Reviews

Write a Review

 

Financial Management Questions & Answers

  Financial intermediarie play crucial role in economic crisis

“Financial intermediaries play a crucial role in an economic crisis–they are responsible for both causing the market to crash and then helping it recover from the crisis.” Is this statement true? Discuss with an example.

  Fundamentals of managerial finance

Bonds are thought to be a nice constant investment, paying a certain value of interest and then repaying your original investment [usually $1,000] after the bond term is up, usually in ten to thirty years.

  Calculate the total amount of annual operating expenses

Given the following information, calculate the total amount of annual operating expenses for this income-producing Property. Lawn care: $10,000. Property taxes: $24,000, Maintenance: $35,000, Janitorial: $25,000, Security Patrol: $32,000, Debt servic..

  A suppose the second last 127 million and last 767 million

a. suppose the second last 12.7 million and last 76.7 million mortgage loans in loan group 1 in the nationwide

  Calculated his return on investment

George bought an investment one year ago and just calculated his return on investment. He found that his purchasing power has increased by 15% as a result of his investment. If the inflation over the period was 4%, his _______________.

  What is futons abnormal rate of return

Analysis of 60 monthly rates of return on United Futon common stock indicates a beta of 1.58 and an alpha of –0.33% per month. A month later, the market is up by 6.3%, and United Futon is up by 7.3%. What is Futon’s abnormal rate of return?

  The covariance of the returns between willow stock

The covariance of the returns between willow stock and sky diamond stock is 0.0900. The variance of willow is 0.2350, and the variance of sky diamond is 0.1180. What is the correlation coefficient between the returns of the two stocks?

  What simple interest rate would a bank

What simple interest rate would a bank have to offer a client to compete with another bank that offers 25% return compounded daily?

  What are the major categories of depository institution

What are the major categories of depository institution assets and their approximate percentage contribution to total resources? What are the major categories of depository institution liabilities? What are the fundamental differences between them?

  About the making plans for retirement

You and your wife are making plans for retirement. You plan on living 30 years after you retire and would like to have $80,000 annually on which to live. Your first withdrawal will be made one year after you retire and you anticipate that your retire..

  What is its price to earnings ratio

Plyler Overhead Door has $1,747,000 in sales, generates a net profit margin is 9.3%, and the firm has 18,000 shares of stock outstanding. The company’s stock price is $130. What is its price to earnings ratio?

  What was your dollar return on this investment

You purchased 310 shares of a particular stock at the beginning of the year at a price of $76.73. The stock paid a dividend of $1.65 per share, and the stock price at the end of the year was $83.24. What was your dollar return on this investment?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd