4. Suppose a platinum mining firm sells Mrs. Fiske 1 warrant. The firm has 2 sha

Question

4. Suppose a platinum mining firm sells Mrs. Fiske 1 warrant. The firm has 2 shares outstanding. Mr. Gould owns one share and Ms. Rockefeller owns the other share. The assets of the firm are seven ounces of platinum, which were purchased at a price of $500 per ounce shortly before the warrant was sold. The warrant allows the holder to purchase 1 share in the firm for an exercise price of $1,800. All funds that enter the firm are used to purchase more platinum. (a) [5 points] What was the price of the firm’s stock before the warrant was sold? (b) [5 points] What is the lowest platinum price where Mrs. Fiske would find it in her interest to exercise her warrant? (c) [5 points] Suppose the price of platinum suddenly rises to $520 per ounce. If Mrs. Fiske exercises her warrant, how much will she profit from the exercise? (d) [5 points] Suppose the price of platinum suddenly rises to $520 per ounce. Suppose that no warrant had been issued and that Mrs. Fiske instead exercised a call option to purchase 1 share for $1,800, how much will she profit from exercising the option?

Explanation / Answer

(a) [5 points] What was the price of the firm’s stock before the warrant was sold?

Answer:

Total value of the asset = $500 x 7 Ounces = $3500

Number of shares = 2

Therefore,

Value of each share = $3500/2 = $1750

(b) [5 points] What is the lowest platinum price where Mrs. Fiske would find it in her interest to exercise her warrant?

Answer:

Let the lowest price be w

Therefore (7 ounce x w) / 2 = 1800

W = 3600/7 = $514.3

The lowest price of the platinum = $514.3

(c) [5 points] Suppose the price of platinum suddenly rises to $520 per ounce. If Mrs. Fiske exercises her warrant, how much will she profit from the exercise?

Answer:

Her profit would be = $1800 – (7 x $520)/2 = $20

(d) [5 points] Suppose the price of platinum suddenly rises to $520 per ounce. Suppose that no warrant had been issued and that Mrs. Fiske instead exercised a call option to purchase 1 share for $1,800, how much will she profit from exercising the option?

Answer:

The new price of Two shares = 7 x $520 = $3640

Price of a share = $3640/2 = $1820

Her profit = $1820-$1800 –call premium = $20 –call premium(if any)

If call premium = 0

Then here profit = $20

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.