Question
Red Herring Pizza has outstanding warrants, where each warrant entitles the holder to purchase two shares of stock at $24 per share. The market price
Red Herring Pizza has outstanding warrants, where each warrant entitles the holder to purchase two shares of stock at $24 per share. The market price per share of stock and market price per warrant were the following over the last year:
| OBSERVATION | |||||
| 1 | 2 | 3 | 4 | 5 | 6 |
Stock price | $20 | $18 | $27 | $32 | $24 | $38 |
Warrant price | 5 | 3 | 12 | 20 | 8 | 29 |
Determine the theoretical value per warrant for each of these observations. Then plot the market value per warrant in relation to this theoretical value. At what price per common share is the warrant premium over theoretical value the greatest? Why?
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Step: 1
The theoretical value per warrant is calculated using the following formula Theoretical value per w...
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Fundamentals of Investments Valuation and Management
Authors: Bradford D. Jordan, Thomas W. Miller
5th edition
978-007728329, 9780073382357, 0077283295, 73382353, 978-0077283292
