Unformatted text preview: ree shares
of common stock. The warrants were initially attached to a bond issue to sweeten
the bond. The common stock of the firm is currently selling for $45 per share.
Substituting P0 $45, E $40, and N 3 into Equation 16.2 yields a theoretical
warrant value of $15 [($45 $40) 3]. Therefore, Dustin’s warrants should sell
for $15 in the marketplace. Market Value of a Warrant
The market value of a stock purchase warrant is generally above the theoretical
value of the warrant. Only when the theoretical value of the warrant is very high
or the warrant is near its expiration date are the market and theoretical values
close. The general relationship between the theoretical and market values of
Dustin Electronics’ warrants is presented graphically in Figure 16.2. The market
value of warrants generally exceeds the theoretical value by the greatest amount
when the stock’s market price is close to the warrant exercise price per share. The
amount of time until expiration also affects the market value of the warrant.
Generally speaking, the closer the warrant is to its expiration date, the more
likely that its market valu...
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