Ross公司理财(第七版)答案 Ch024

Chapter 24: Warrants and Convertibles

24.1 a. A warrant is a security that gives its holder the right, but not the obligation, to buy shares of common

stock directly from a company at a fixed price for a given period of time. Each warrant specifies the

number of shares of stock that the holder can buy, the exercise price, and the expiration date.

b. A convertible bond is a bond that may be converted into another form of security, typically common

stock, at the option of the holder at a specified price for a specified period of time.

24.2 a. If the stock price is less than the exercise price of the warrant at expiration, the warrant is worthless.

Prior to expiration, however, the warrant will have value as long as there is some probability that the

stock price will rise above the exercise price in the time remaining until expiration. Therefore, if the

stock price is below the exercise price of the warrant, the lower bound on the price of the warrant is

zero.

b.If the stock price is above the exercise price of the warrant, the warrant must be worth at least the

difference between these two prices. If warrants were selling for less than the difference between the

current stock price and the exercise price, an investor could earn an arbitrage profit (i.e. an immediate

cash inflow) by purchasing warrants, exercising them immediately, and selling the stock.

c.If the warrant is selling for more than the stock, it would be cheaper to purchase the stock than to

purchase the warrant, which gives its owner the right to buy the stock. Therefore, an upper bound on

the price of any warrant is the firm’s current stock price.

24.3 a. The primary difference between warrants and call options is that, when warrants are exercised, the firm

issues new shares. Both the purchase price and the exercise price of a warrant are received by the firm

and increase the value of its assets. Unless a firm is selling calls on its own shares, this does not hold

true for options.

b.When call options are exercised, the number of shares the firm has outstanding remains unchanged.

Shares of the company’s stock are simply transferred from one individual to another. When warrants

are exercised, however, the number of shares outstanding increases. This results in the value of the

firm being spread out over a larger number of shares, often leading to a decrease in value of each

individual share. The decrease in the per-share price of a company’s stock due to a greater number of

shares outstanding is known as dilution.

24.4 a. Before the warra nt was issued, Survivor’s assets were worth $3,500 (= 7 oz of platinum * $500 per

oz). Since there are only two shares of common stock outstanding, each share is worth $1,750 (=

$3,500 / 2 shares).

b.When the warrant was issued, the firm received $500 fr om Tina, increasing the total value of the firm’s

assets to $4,000 (= $3,500 + $500). If the two shares of common stock were the only outstanding

claims on the firm’s assets, each share would be worth $2,000 (= $4,000 / 2 shares). However, since

the warr ant gives Tina a claim on the firm’s assets worth $500, the value of the firm’s assets available

to stockholders is only $3,500 (= $4,000 - $500). Since there are two shares outstanding, Survivor’s

value per share remains at $1,750 (= $3,500 / 2 shares) after the warrant issue. Note that the firm uses

Tina’s $500 to purchase one more ounce of platinum.

c.If the price of platinum is $520 per ounce, the total value of the firm’s assets is $4,160 (= 8 oz of

platinum * $520 per oz). If Tina does not exercise h er warrant, the value of the firm’s assets would

remain at $4,160 and there would be two shares of common stock outstanding. If Tina exercises her

warrant, the firm would receive the warrant’s $1,800 striking price and issue Tina one share. The total

val ue of the firm’s assets would increase to $5,960 (= $4,160 + $1,800). Since there would now be 3

shares outstanding and no warrants, Survivor’s price per share would be $1,986.67 (= $5,960 / 3

shares). Since the $1,986.67 value of the share that she will receive is greater than the $1,800 exercise

price of the warrant, investors will expect Tina to exercise. The firm’s stock price will reflect this

information and rise to $1,986.67per share on the warrant’s expiration date.

24.5 a. Since the stock price is currently below the exercise price of the warrant, the lower bound on the price

of the warrant is zero. If there is only a small probability that the firm’s stock price will rise above the

exercise price of the warrant, the warrant has little value. An upper bound on the price of the warrant