The warrants were initially attached to a bond issue

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

This document was uploaded on 01/19/2014.

Ask a homework question - tutors are online