Problem:
Company Z issued bonds with detachable warrants several years ago. Each warrant allows the holder to purchase one share of stock at $30 per share. The stock has a beta of 1.3.
Required:
Question 1: Calculate the exercise value of the warrants if the price of the underlying stock is $35.
Question 2: How much would an investor likely be willing to pay for the warrant over and above its exercise value? Why?
Question 3: Would the investor likely be willing to pay more or less for the warrant if the stock had a beta of 1.0? Why?
Question 4: Is a warrant more similar to a call option or a put option? Why?
Question 5: Why might an investor prefer to buy warrants rather than the underlying stock?
Note: Please show the work not just the answer.