Suppose the value of ABC corporation is now $200 and the value of the firm will

Question

Suppose the value of ABC corporation is now $200 and the value of the firm will be either $300 one year from today or $100 year from today. The firm is financed with 100 shares of common stock and 100 warrants. Each warrant provides its owner with the right not the obligation to purchase from the firm at t=1 one share of common stock by paying it a fixed price of $1.5. Suppose the risk - neutral probability of upside change in 50 percent and risk-neutral probability of downside change is 50 percent. The risk-free rate is 8%. What are the market price of the stock at t=0? What are the market price of the warrant at t=o?

Explanation / Answer

A.The market price of the stock at t=0 are 36.

B.The market price of the warrant at t=0 are 70.

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