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Of course because leverage works both ways it results

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Unformatted text preview: lear from the example. Of course, because leverage works both ways, it results in greater risk. If the market price fell by $3, the loss on the stock would be $162, whereas the loss on the warrants would be close to $1,215. Clearly, investing in warrants is more risky than investing in the underlying stock. Review Questions 16–9 What are stock purchase warrants? What are the similarities and key differences between the effects of warrants and those of convertibles on the firm’s capital structure and its ability to raise new capital? 16–10 What is the implied price of a warrant? How is it estimated? To be effective, how should it be related to the estimated market value of a warrant? 16–11 What is the general relationship between the theoretical and market values of a warrant? In what circumstances are these values quite close? What is a warrant premium? LG6 16.5 Options option An instrument that provides its holder with an opportunity to purchase or sell a specified asset at a stated price on or...
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