1.You firm's stock price could go up by 20% or fall by 10% over the next year.

a.Use the 5-year government rate to find the price of a European call option on the stock with an exercise price $3 less than the current stock price with a maturity of 1 year (Use either the binomial or the risk-neutral method).

b.Ajax has 1,575,000 shares outstanding and plans to issue 90,000 warrants.Each warrant holder can purchase 3 new shares of stock.What is the value of the warrant?Assume the exercise price is $17 (the same as the call from part a).

c.Ajax decides to issue a bond with the warrants instead.Use your debt rate (Rd) as the yield for bonds without warrants.Assume the bonds are 10-year bonds with annual coupons.There are 80 warrants attached to each bond.Set the coupon rate so the total package sells for $1000.

d.What concerns should Ajax have about using warrants?

If any assumptions have been made, please indicate assumptions