Final answer:
The stock price of Through Fire, Incorporated can be determined before and after the issuance of the warrant, as well as on the warrant's expiration date.
Step-by-step explanation:
Through Fire, Incorporated is an all-equity firm that has ten shares of stock outstanding. Yesterday, the firm's assets consisted of eleven ounces of platinum, which was worth $1,830 per ounce. Today, the company issued a warrant to Janet Wu with a fair value of $1,830. The warrant gives Janet the right to buy a single share of the firm's stock for $2,080 and can only be exercised on its expiration date one year from today. The firm used the proceeds from the issuance to immediately purchase an additional ounce of platinum.
a. To find the price of a single share of stock before the warrant was issued, we need to determine the total value of the firm's assets before the issuance. Since the firm had ten shares and eleven ounces of platinum, the total value of the firm's assets before the issuance was 10 x 1,830 = $18,300. Therefore, the price of a single share of stock before the warrant was issued was $18,300 / 10 = $1,830.
b. To find the price of a single share of stock immediately after the warrant was issued, we need to consider the additional ounce of platinum purchased with the warrant proceeds. Since each ounce of platinum is worth $1,830, the total value of the firm's assets after the issuance is 11 x 1,830 = $20,130. Dividing this value by the ten outstanding shares gives us a price of $2,013 per share.
c. If platinum is selling for $2,030 per ounce on the warrant's expiration date in one year, the value of a single share of stock would be equal to the value of the firm's assets divided by the number of outstanding shares. With eleven ounces of platinum worth $2,030 each, the total value of the firm's assets on the warrant's expiration date is 11 x 2,030 = $22,330. Dividing this value by the ten outstanding shares gives us a price of $2,233 per share.