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