Harmony, Inc. recently issued convertible debt that has five years to maturity. The conversion price on the debt is $30. If the bondholders were to convert their debt into equity, Harmony would have to issue 1,000,000 new shares. In conjunction with this debt issue, Harmony purchased a call option with an exercise price of $30 on 1,000,000 shares. Additionally, Harmony sold warrants on 300,000 shares of their stock with an exercise price of $45.
Please answer the following two questions:
Question #1. What is the purpose of Harmony purchasing the call option?
Question #2. As an analyst, what range do you think that Harmonys price will fall within over the next five years? Why?
