Quantum Inc. has warrants outstanding that allow the holder to purchase 1.5 shar

Question

Quantum Inc. has warrants outstanding that allow the holder to purchase 1.5 shares of stock per warrant at $22 per share (exercise price). Thus each individual share can be purchased at $22 with the warrant. The common stock is currently selling for $29. The warrant is selling for $12.00.

a. What is the intrinsic (minimum) value of this warrant? (Do not round intermediate calculations and round your answer to 2 decimal places.)
  

b. What is the speculative premium on this warrant? (Do not round intermediate calculations and round your answer to 2 decimal places.)
  

Explanation / Answer

a.

I = (M – E) × N

Where:

I= Intrinsic value of a warrant

M = Market value of common stock

E = Exercise price of a warrant

N = Number of shares each warrant entitles the holder to purchase

I= (29-22) × 1.5 = $10.5

b.

S = W – I

Where:S = Speculative premium

W = Warrant price

I= Intrinsic value

S = $12 – $10.5 = $1.5

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