Western Hatcheries Limited has market value of equity of $60 million and market value of debt of $40 million. The firm has $100 million worth of total assets. The outstanding shares are 2.5 million shares. The firm has issued debentures ($100 each) of total amount of $25 million in addition with one warrant of $1 for each debenture. At end of two years, the warrant will entitle the debenture holder to apply for one equity share with exercise price of $25. The estimated interest rate is 12%. Before the debenture share issue, the annual standard deviation of variability in the share price will be 1.58 .Calculate the value of warrant.
a. The value of warrant is $12.65.
b. The value of warrant is $15.48.
c. The value of warrant is $20.52.
d. The value of warrant is $18.65.