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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 Preview


    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
    = ...

    Solution Summary

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