Warrants [6]

A firm has issued 500 shares of stock, 100 warrants and a straight bond. The warrants are about to expire and all of them will be exercised. Each warrant entitles the holder to 5 shares at $25 per share. The market value of the firm's assets is 25,000. The market value of the straight bond is 8,000. That of equity is 15,000.

1. Determine the post-exercise value of a share of equity.

2. What is the mispricing of equity?

3. From the proceeds of immediate exercise, value the warrant.

4. Now assume that the market value of debt becomes $9,000, to reflect the increase in the value of the firm upon warrant exercise (which lowers the probability of bankruptcy). Re-compute the value of the warrants and of equity.