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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 Summary

Calculates the intrinsic value of the warrant and the speculative premium on the warrant.

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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 ...

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