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Warrant and its Intrinsic Value

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22) Mr. John Hailey has $1000 to invest in the market. He is considering buying 50 shares of Comet Airlines at $20 per share. His broker suggests that he may wish to consider purchasing warrants instead. The warrants are selling for $5, and each warrant allows him to purchase one share of comet Airlines common stock at $18 per share.

Assuming the speculative premium remains $3.50 over the intrinsic value, how far would the price of the stock have to fall before the warrant has no value?

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Solution Summary

How to calculate intrinsic value, current stock price?

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The formula to calculate warrant premium is

premium = 100 x ((warrant price + exercise price) - share price) / ...

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