What is the pre-announcement funds that the firm

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The corporation you work for needs financing. It could issue warrants, sell stock or bonds to finance the firm. Several issues confront you as an analyst. The firm currently has 1 million shares of stock outstanding. The warrants, if issued, will be for rights on 200,000 shares of stock. The strike price on the warrants will be $30.00 per share, time to expiration will be 5 years, stock price, prior to announcement is $50, the stock price may increase or decrease by 25% over the next five years, the continuous annual risk-free interest rate is 3% per year, the standard deviation of stock returns is 20% per year. After the announcement that you will be issuing the warrants the stock price drops to $40.00 per share. Your uptick and downtick expectations have not been altered by the stock price decline.

A. What is the pre-announcement funds that the firm could hope to raise through the sale of the warrants (ignoring transactions costs).

B. What is the post announcement funds that the firm could hope to raise through the sale of the warrants (ignoring transactions costs).

C. Why do A and B differ due the fact that investors will adjust downward the current stock price by the amount of the expected dilution?

D Which of the three possible issuances (warrants, stock, bonds) will be likely to have the greatest negative effect on stock price?

Reference no: EM132040910

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