Horizon Corporation has warrants to purchase common stock outstanding. Each warrant entitles the holder to purchase one share of the company's common stock at an exercise price of $20 a share. Suppose the warrants expire on September 1, 2003. One month ago, when the company's common stock was trading at about $21.50 a share, the warrants were trading at $5 each.
a. What was the formula value of the warrants one month ago?
b. What was the premium over the formula value one month ago?
c. What are the reasons investors were willing to pay more than the formula value for these warrants one month ago?
d. Suppose that in August 2003 the Horizon common stock is still trading at $21.50 a share. What do you think the warrant price would be then? Why?
e. Horizon paid an annual dividend of $1 a share, as of one month ago, to its common shareholders. Do warrant holders receive dividends?