Questions -
1. Valuing Warrants
Assume a firm has warrants outstanding that permit the holder to buy one new share of stock at $30 per share. The market price of the stock is now $36.
What is the intrinsic value of the warrant? Why might the warrant sell for $2 in the market even if the stock price is $28?
2. Comparative Analysis and warrants
A firm has warrants outstanding that allow the holder to buy one share of stock at $30 per share. The stock is selling for $35 per share, and the warrants are now selling for $7 per warrant (this, of course, is above intrinsic value). You can invest $1,000 in the stock or the warrants (for purposes of the computation, round to two places to the right of the decimal point). Assume the stock goes to $42, and the warrants trade at their intrinsic value when the stock goes to $42. Would you have a larger total dollar profit by initially investing in the stocks or the warrants? Show your calculations.
3. Features of Convertible Bond
A convertible bond has a face value of $1,000 and the conversion price is $40 per share. The stock is selling at $33 per share. The bond pays $70 per year in interest ($35 semiannually) and is selling in the market for $960. It matures in 10 years. Market rates are 12 percent per year. Show your calculations.
a. What is the conversion ratio?
b. What is the conversion value?
c. What is the conversion premium (in dollars and percent)?
d. What is the pure bond value?
4. International Investing
The treasurer of a major U.S. firm has $12 million to invest for three months. The interest rate in the U.S. is 0.42 percent per month. The interest rate in the UK is 0.52 percent per month. The spot exchange rate is £0.70, and the three-month forward rate is £0.71. Ignoring transaction costs, in which country would the treasurer want to invest the company's funds? Why?
5. Exchange Rates
Suppose the spot exchange rate for the Canadian dollar is Can$1.19 and the six-month forward rate is Can$1.16. Assuming absolute PPP holds, what is the current cost in the United States of a beer if the price in Canada is Can$3.75?
6. Exchange Rates If you have three thousand euros, how many dollars do you have given the following exchange rates?
7. Exchange Rates and Financial Statements
A U.S. firm has total assets valued at £890,000 located in London. This valuation did not change from last year. Last year, the exchange rate was £0.62 = $1. Today, the exchange rate is £0.68 = $1. By what amount did these assets change in value on the firm's U.S. financial statements?
8. Exchange Rates
Currently, you can exchange €100 for $134.15. The inflation rate in Euroland is expected to be 3.1 percent as compared to 3.6 percent in the U.S. Assuming that relative purchasing power parity exists, what should the exchange rate be five years from now?