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Derivative security analysis: Microsoft

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Microsoft plans on issuing a 10 year bond with European style equity warrants that expire in 6 years and have an exercise price of $260. Microsoft currently has 1500 million shares outstanding and wishes to raise an additional $300 million with these warrants. The last closing price of Microsoft shares was $250. The risk free 6,5% per annum and the annualized 90 day volatility of Microsoft shares is 24,32%. Microsoft has an annual dividend yield of 2,3%.

a) estimate the fair value of the warrants, first using the relevant information to calculate black scholes value of analogous call option

b) determine the stock price at expiration, assuming the warrants are exercised if the value of Microsoft is at least $420 billion

c) Someone asks you if delta of the warrant will be the same as an equivalent call option. What will you say?

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Solution Summary

This solution explores derivative security analysis for Microsoft.

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Please refer to attachment for proper formatting.

Given that,
Number of shares outstanding=1,500 million
Number of shares to be issued with warrants=300 million
Exercise price=$260
Spot price of stock=$250
Risk free rate=6.5%
Standard deviation=24.32%
Annual dividend ...

Solution provided by:
Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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