Here is a question about dilution. The Electric Bassoon Company has outstanding 2,000 shares with a total market value of $20,000 plus 1,000 warrants with a total market value of $5,000. Each warrant gives its holder the option to buy one share at $20.

(a) To value the warrants, you first need to value a call option on an alternative share. How might you calculate its standard deviation?

(b) Suppose that the value of a call option on this alternative share was $6. Calculate whether the Electric Bassoon warrants were undervalued or overvalued.