Chapter 5: Q10DQ (page 622)

What are the reasons that warrants often sell above their intrinsic value?

Short Answer

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The fundamental reason for a warrant to sell at a price above its intrinsic value is the opportunity for leverage.

Step by step solution

Step 1:Introduction of Intrinsic value-

Intrinsic value of a stock is its actual value. This is computed on the basis of the monetary advantage expected to receive from it in the future.

The reasons that warrants often sell above their intrinsic value

Warrants might sell above their intrinsic value because the investors see the stock's possibilities as being bright, or there is a reasonable measure of time to run before the warrant expires and are also allow for the utilization of leveraged investing. For instance, in a company one share of common stock can be purchased for each warrant held and the exercise price is Rs. 80.

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Assets
	Book value	Liquidation value
Accounts receivables	\(1,400,000	\)1,200,000
Inventory	\(1,800,000	\)900,000
Machinery and equipment	\(1,100,000	\)600,000
Building and plant	\(4,200,000	\)2,500,000
Total assets	\(8,500,000	\)5,200,000

Liabilities and stockholder’s claims
Liabilities
Accounts payable	\(2,800,000
First lien, secured by machinery and equipment	\)900,000
Senior unsecured debt	\(2,200,000
Subordinated debenture	\)1,700,000
Total liabilities	\(7,600,000
Stockholder’s claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder’s claims	\)900,000
Total liabilities and stockholder’s claims	$8,500,000

What are the reasons that warrants often sell above their intrinsic value?

Short Answer

Step by step solution

Step 1:Introduction of Intrinsic value-

The reasons that warrants often sell above their intrinsic value

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