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b. Graph the theoretical and market values of the warrant on a set of axes
with per-share common stock price on the x axis and warrant value on the
c. If the warrant value is $12 when the market price of common stock is $50,
does this contradict or support the graph you have constructed? Explain.
d. Specify the area of warrant premium. Why does this premium exist?
e. If the expiration date of the warrants is quite close, would you expect your
graph to look different? Explain.
LG5 16–17 Common stock versus warrant investment Susan Michaels is evaluating the
Burton Tool Company’s common stock and warrants to choose the better
investment. The firm’s stock is currently selling for $50 per share; its warrants to
purchase three shares of common stock at $45 per share are selling for $20.
Ignoring transactions costs, Ms. Michaels has $8,000 to invest. She is quite optimistic with respect to Burton because she has certain “inside information” about
the firm’s prospects with respect to a large government contract.
a. How many shares of stock and how many warrants can M...
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This document was uploaded on 01/19/2014.
- Fall '13