Important information about Warrants
Orne Corporation issued bonds with detachable warrants several years ago. Each warrant allows the holder to purchase one share of stock at $30 per share. The stock has a beta of 1.6.
a Calculate the exercise value of the warrants if the price of the underlying stock is $40.
b. How much would an investor likely be willing to pay for the warrant over and above its exercise value ? Why?
c. Would the investor likely be willing to pay more or less for the warrant if the stock had a beta of 1.0? Why?
d. Is a warrant more similar to a call option or a put option? Why?
e. Why might an investor prefer to buy warrants rather than the underlying stock?
This question has the following supporting file(s):
- Book2.xls
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Solution Summary
Answers questions on warrants.
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Orne Corporation issued bonds with detachable warrants several years ago. Each warrant allows
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the holder to purchase one share of stock at $30 per share. The stock has a beta of 1.6.
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9 a Calculate the exercise value of the warrants if the price of the underlying stock is $40.
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b. How much would an investor likely be willing to pay for the warrant over and above its
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19 exercise value ? Why?
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c. Would the investor likely be willing to pay more or less for the warrant if the stock had a beta
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of 1.0? Why?
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35 d. Is a warrant more similar to a call option or a put option? Why?
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44 e. Why might an investor prefer to buy warrants rather than the underlying stock?
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FINC 5880 Page 1 of 1 9/15/2012
