The value of warrants warrant premium the difference

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Unformatted text preview: ereby reducing its debt service costs. The Value of Warrants warrant premium The difference between the market value and the theoretical value of a warrant. Like a convertible security, a warrant has both a market value and a theoretical value. The difference between these values, or the warrant premium, depends largely on investor expectations and on the ability of investors to get more leverage from the warrants than from the underlying stock. Theoretical Value of a Warrant The theoretical value of a stock purchase warrant is the amount one would expect the warrant to sell for in the marketplace. Equation 16.2 gives the theoretical value of a warrant: TVW (P0 E) N (16.2) where TVW P0 E N theoretical value of a warrant current market price of a share of common stock exercise price of the warrant number of shares of common stock obtainable with one warrant The use of Equation 16.2 can be illustrated by the following example. EXAMPLE Dustin Electronics, a major producer of transistors, has outstanding warrants that are exercisable at $40 per share and entitle holders to purchase th...
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