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Chapter 5: Q4BP (page 624)

The warrants of Dragon Pet Co. allow the holder to buy a share of stock at \(26.20 and are selling for \)14.10. The stock price is currently $23.50. To what price must the stock go for the warrant purchaser to at least be assured of breaking even?

Short Answer

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Answer

The stock price must go to $40.30 for the warrant purchaser to at least be assured of breaking even. So that the warrant will be worth of at least $14.10 i.e., ($26.20 –$14.10) that equals the cost of the warrant.

Step by step solution

01

Introduction of Stock price-

A break-even price is the amount or change in amount, at which a warrant must be sold to cover the costs of acquiring that warrant.

02

Computation of breakeven price-

Breakevenprice=Exerciseprice+Speculativepremium=$26.20+$14.10=$40.30

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