BMGT440hwch24

BMGT440hwch24 - Chapter 24 6 (8th ed.), 8 (8th ed = 12, 7th...

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Chapter 24 6 (8 th ed.), 8 (8 th ed = 12, 7 th ed.), 15 (7 th ed.) 6. (8 th ed.) Warrant Value A warrant gives its owner the right to purchase three shares of common stock at a strike of $32.00 per share. The current market price of the stock is $39.00. What is the minimum value of the warrant? 6. The total exercise price of each warrant is shares each warrant can purchase times the exercise price, which in this case will be: Exercise price = 3($32) Exercise price = $96 Since the shares of stock are selling at $39, the value of three shares is: Value of shares = 3($39) Value of shares = $117 Therefore, the warrant effectively gives its owner the right to buy $117 worth of stock for $96. It follows that the minimum value of the warrant is the difference between these numbers, or: Minimum warrant value = $117 – 96 Minimum warrant value = $21 If the warrant were selling for less than $21, an investor could earn an arbitrage profit by purchasing the warrant, exercising it immediately, and selling the stock. Here, the warrant holder pays less than $21 while receiving the $21 difference between the price of three shares and the exercise price. 12. (7 th ed.), 8. (8 th ed.) Convertible Bond Value Sportime Fitness Center, Inc. issued convertible bonds with a conversion price of $25.00. The bonds are available for immediate conversion. The current price of the company’s common stock is $22.00 per share. The current market price of the convertible bonds is $990.00. The straight bond value of the convertible bonds is not known. a. What is the minimum price for the convertible bonds? b. Explain the difference between the current market price of each convertible bond and the value of the common stock into which it can be immediately converted. ** 24.12 (7 th ed.) = 8 (8 th ed.) a. The conversion price indicates that for each $25 of face value of the bond, the convertible bondholder can receive 1 share. Since the $25 conversion price divides into the $1,000 face value of the bond 40 times (= $1,000 / $25), each convertible bond can be exchanged for 40 shares of Sportime’s stock. 40 = the Conversion Ratio. Since each share is currently trading for $22, the value of immediate conversion of a single convertible
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This note was uploaded on 02/22/2011 for the course BMGT 440 taught by Professor White during the Spring '08 term at Maryland.

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BMGT440hwch24 - Chapter 24 6 (8th ed.), 8 (8th ed = 12, 7th...

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