FINANCE- Pace Western Crystal, Inc. has 10 million shares of common stock outstanding

1. Pace Western Crystal, Inc. has 10 million shares of common stock outstanding and200,000 warrants. Each warrant entitles the holder to purchase 5 shares of commonstock at a price of $15 per share. Warrant holders exercised all of their warrantstoday. The market value of Pace Western’s assets before the exercise was $170million. What should the new stock price be after the exercise?2. A warrant entitles the holder to buy 10 shares of common stock at $21 per share atany time in the next 3 months. If the market price is $15 does this imply that themarket price of the warrant will be 0?3. Suppose a platinum mining firm sells Mrs. Fiske a warrant. The firm has 2 sharesoutstanding. 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 priceof $500 per ounce shortly before the warrant was sold. The warrant allows the holderto purchase 1 share in the firm for an exercise price of $1,800. All funds that enterthe firm are used to purchase more platinum.(a) What was the price of the firm’s stock before the warrant was sold?(b) What is the lowest platinum price where Mrs. Fiske would find it in her interest toexercise her warrant?(c) Suppose the price of platinum suddenly rises to $520 per ounce. If Mrs. Fiskeexercises her warrant, how much will she profit from the exercise?(d) Suppose the price of platinum suddenly rises to $520 per ounce. If Mrs. Fiskeexercised a call option to purchase 1 share for $1,800, how much will she profit fromexercising the option?4. Ryan Home Products issued $430,000 of 8% convertible debentures. Each bond isconvertible into 28 shares of common stock at anytime before maturity. The currentprice of the bonds is $1,180 and the current price of Ryan common is $31.25. Thebonds were originally issued at a price of $1,000 (face value) at a time when the stockalso sold for $31.25.(a) What is the conversion ratio?(b) What is the conversion price?(c) What is the conversion premium?(d) What is the conversion value?5. Ms. Blavatsky is proposing to form a new start-up firm. She can invest in one of twoprojects. The relatively safe project offers a 40 percent chance of a $9 million payoffand a 60 percent chance of an $8 million payoff. The risky project offers a 20 percentchance of a $20 million payoff and a 80 percent chance of a $5 million payoff. Ms.Blavatsky initially proposes to finance the firm by an issue of straight bonds with apromised payoff of $7 million. Show the possible payoffs to the lender and to Ms.Blavatsky if:(a) she invests in the safe project(b) she invests in the risky projectWhich project will she choose if she issues these straight bonds?(c) Suppose now that Ms. Blavatsky offers to make the debt convertible into ¾ of thefirm’s equity. Show that the convertible bondholder receives the same expectedpayoff from the two projects.(d) Which project Ms. Blavatsky choose if she finances the firm with convertibledebt?

 

 

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