694 part 6 special topics in managerial finance

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Unformatted text preview: e will equal its theoretical value. 694 PART 6 Special Topics in Managerial Finance FIGURE 16.2 60 Value of Warrant ($) Values and Warrant Premium The values and warrant premium for Dustin Electronics’ stock purchase warrants 50 40 30 Market Value 20 10 0 Theoretical Value Warrant Premium 10 20 30 40 50 60 70 Price per Share of Common Stock ($) Warrant Premium The warrant premium, or the amount by which the market value of Dustin Electronics’ warrants exceeds the theoretical value of these warrants, is also shown in Figure 16.2. This premium results from a combination of positive investor expectations and the ability of the investor with a fixed sum to invest to obtain much larger potential returns (and risk) by trading in warrants rather than the underlying stock. EXAMPLE Stan Buyer has $2,430, which he is interested in investing in Dustin Electronics. The firm’s stock is currently selling for $45 per share, and its warrants are selling for $18 per warrant. Each warrant entitles the holder to purchase three shares of Dustin’s comm...
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This document was uploaded on 01/19/2014.

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