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Warrant and its Intrinsic Value

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?

Solution Preview

The formula to calculate warrant premium is

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

Solution Summary

How to calculate intrinsic value, current stock price?

$2.19