CHAPTER 20

Chapter23discusseshowdilutionaffectsthe

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Unformatted text preview: e of the six­month call is greater than the value of the six­month put. 6. [Note: In the first printing of the seventh edition, the call option price is shown incorrectly as $2.30. The price should be $12.30.] From put­call parity: C + [EX/(1 + r)0.50] = P + S P = ­S + C + [EX/(1 + r)0.50] = ­27.27 + 12.30 + [22.50/(1.0390.50)] = $7.10 7. Internet exercise; answers will vary. 8. a. Rank and File has an option to put the stock to the underwriter. b. 1. EX = exercise price of the rights 2. t = time from rights agreement to final exercise date for right 3. s2 = variance of stock returns 4. rf = interest rate [Note: The answer to (b) ignores dilution. Chapter 23 discusses how dilution affects the valuation of warrants and convertibles. Dilution has a similar effect on the valuation of standby underwriting. This is because, if the option is exercised, the underwriter pays the issue price, but also obtains an equity stake in this new money. After reading Chapter 23, students might return to the issue of the effect of dilution on the value of standby agreements.] 9. The $100 million threshold can be viewed as an e...
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