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Valuation of Warrants

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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 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 states above? Explain this relationship.

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Solution Summary

This explains the steps to calculate the value warrants, premium and related concepts.

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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.

Investopedia Says... the intrinsic value is the difference between the warrant's exercise price and the market price of the underlying. The premium is anything paid above the intrinsic value for the warrant. Typically the premium will decrease as the price of the warrant rises and the time to expiration decreases.
(www.investopedia.com)
a. What is the intrinsic value of the warrant?
I = (M-E) X N
Where:
I = ...

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