What is the intrinsic value of the warrant


Question 1: Laser Electronics Company has $30 million in 8 percent convertible bonds outstanding. The conversion ratio is 50; the stock price is $17; and the bond matures in 15 years. The bonds are currently selling at a conversion premium of $60 over their conversion value. If the price of the common stock rises to $23 on this date next year, what would your rate of return be if you bought a convertible bond today and sold it in one year? Assume on this date next year, the conversion premium has shrunk from $60 to $10.

Question 2: Assume you can buy a warrant for $5 that gives you the option to buy one share of common stock at $14 per share. The stock is currently selling at $16 per share.

a. What is the intrinsic value of the warrant?

b. What is the speculative premium on the warrant?

c. If the stock rises to $24 per share and the warrant sells at its theoretical value without a premium, what will be the percentage increase in the stock price and the warrant price if you bought the stock and the warrant at the prices stated above? Explain this relationship.

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Finance Basics: What is the intrinsic value of the warrant
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