A firm has 100,000 shares of stock outstanding priced at $35 per share. The firm has no debt and does not pay a dividend. To raise more capital, it plans to issue 10,000 warrants, each allowing for the purchase of one share of stock at a price of $50. The warrants are European-style and expire in five years. The standard deviation of the firm's common stock is 34 percent, and the continuously compounded, five-year risk-free rate is 5.2 percent.

a. Estimate the fair value of the warrants, first using the relevant information to calculate the Black-Scholes value of an analogous call option.

b. Determine the stock price at expiration, assuming the warrants are exercised if the value of the firm is at least $5,200,000.

c. Using the information in Parts a and b about initial and terminal warrant and stock prices, discuss the relative merits of these two ways of making an equity investment in the firm.