Chapter 5: Q2BP (page 624)

Quantum Inc. has warrants outstanding that allow the holder to purchase 1.5 shares of stock per warrant at $30 per share (exercise price). Thus each individual share can be purchased at $30 with the warrant. The common stock is currently selling for $36. The warrant is selling for $12.
a. What is the intrinsic (minimum) value of this warrant?
b. What is the speculative premium on this warrant?
c. What should happen to the speculative premium as the expiration date approaches?

Short Answer

Expert verified

Answer

Intrinsic (minimum) value of this warrant is $9
Speculative premium on this warrant is $3
The speculative premium ought to reduce and become $0 as the expiration date appears.

Step by step solution

Computation of intrinsic (minimum) value of this warrant

$I n t r i n s i c v a l u e = (M a r k e t v a l u e o f c o m m o n s t o c k - E x e r c i s e p r i c e o f w a r r a n t) \times N u m b e r o f s h a r e s e a c h w a r r a n t h o l d e r t o p u r c h a s e = ($ 36 - $ 30) \times 1.5 = $ 9$

Computation of speculative premium

$S p e c u l a t i v e p r e m i u m = W a r r a n t p r i c e - I n t e r i n s i c v a l u e = $ 12 - $ 9 = $ 3$

Step 3:Analysis

An speculative premium is the current price of an option contract that is not expired or the income received by an investor who sells an option contract. As the expiry date approchs the speculation premium should be zero as the price need to cover the extrinstic value and make it nil.

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In \( millions		In \) millions
Current assets	\(70	Current liabilities	\)30
Fixed assets	\(70	Long-term liabilities	\)30
		Total liabilities	\(60
		Stockholder’s equity	\)80
Total assets	\(140	Total stockholder’s equity and liabilities	\)140

Short Answer

Step by step solution

Computation of intrinsic (minimum) value of this warrant

Computation of speculative premium

Step 3:Analysis

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