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Warrant's Intrinsic Value calculation and Share Price

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Assume you can buy a warrant for $5 that gives you the option to buy one share of common stock at $14 per share. The stock is currently selling at $16 per share.

a. What is the intrinsic value of the warrant?
b. What is the speculative premium on the warrant?
c. If the stock rises to $24 per share and the warrant sells at its theoretical value without a premium, what will be the percentage increase in the stock price and the warrant price if you bought the stock and the warrant at the prices stated above? Explain this relationship.

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Solution Summary

Solution clearly explains the Warrant's Intrinsic Value calculation and Share Price appreciation with a warrant with an example.

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Solution:

Warrant Price, W = $5
Exercise Price of share, E = $14
Number of shares, N= 1
Market value of share M = $16

1) Intrinsic Value of warrant (I)

I = (M-E) X N
= (16-14)X1
= ...

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