Unformatted text preview: ereby reducing its debt service costs. The Value of Warrants
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
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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