This preview shows page 1. Sign up to view the full content.
Unformatted text preview: e will equal its theoretical value. 694 PART 6 Special Topics in Managerial Finance FIGURE 16.2 60
Value of Warrant ($) Values and Warrant
The values and warrant
premium for Dustin
Electronics’ stock purchase
10 0 Theoretical
Premium 10 20 30 40 50 60 70 Price per Share of Common Stock ($) 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
View Full Document
This document was uploaded on 01/19/2014.
- Fall '13