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Problem:

Company Z issued bonds with detachable warrants several years ago. Each warrant allows the holder to purchase one share of stock at $30 per share. The stock has a beta of 1.3.

Required:

Question 1: Calculate the exercise value of the warrants if the price of the underlying stock is $35.

Question 2: How much would an investor likely be willing to pay for the warrant over and above its exercise value? Why?

Question 3: Would the investor likely be willing to pay more or less for the warrant if the stock had a beta of 1.0? Why?

Question 4: Is a warrant more similar to a call option or a put option? Why?

Question 5: Why might an investor prefer to buy warrants rather than the underlying stock?

Note: Please show the work not just the answer.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M91163363

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