Question
Omega Airline's capital structure consists of 2.7 million shares of common stock and zero coupon bonds with a face value $18 million that mature in
Omega Airline's capital structure consists of 2.7 million shares of common stock and zero coupon bonds with a face value $18 million that mature in six months. The firm just announced that it will issue warrants with an exercise price of $95 and six months until expiration to raise the funds to pay off its maturing debt. Each warrant can be exercised only at expiration and gives its owner the right to buy a new issued share of common stock. The firm will place the proceeds from the warrant issue immediately into Treasury bills. The market vlaue balance sheet shows that the firm will have assets worth 40 million after the announcement. The company does not pay dividends. The standard deviation of the returns on the firm's assets is 50 percent, and Treasury bills sith a 6 month maturity yield 6 percent. How many warrants must the company issue today to be able to use the procceeds from the sale to pay off the firm's debt obligation in 6 months?
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