Question
Brown plc has 2 million shares of equity and 100,000 warrants. Each warrant gives its owner the right to purchase one share of newly issued
Brown plc has 2 million shares of equity and 100,000 warrants. Each warrant gives its owner the right to purchase one share of newly issued equity for an exercise price of 25. The warrants are European and will expire after two years from now. Brown plc is an all-equity financed firm. The market value of the company's assets is 40 million. The annual standard deviation of returns on the firm's assets is 30%. Treasury bills that mature in two years yield a continuously compounded interest rate of 2% per annum. The warrants are currently trading at 1.96. Are these warrants fairly priced? Support your answer with relevant calculations.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started