Chapter 22 Convertibles, Exchangables, and Warrants

Theoretical value of a warrant:

max [ (N)(Ps) – E, 0]

N = 1, Ps = $10 , E = $5

max[(1)($10) – $5, 0] = $5

N = 1, Ps = $15 , E = $5

max[(1)($15) – $5, 0] =$10

Warrant Value
Associated Common Stock Price
$5
$10
Stock appreciates 50%
Theoretical warrant
value appreciates 100%
Minimum
value is 0.
Example of the Valuation of a Warrant

The market value of a warrant equals or exceeds the theoretical value of the warrant.

• The market value of a warrant equals or exceeds the theoretical value of the warrant.
• The greater market value is generated by the unlimited upside potential of the stock price combined with the limited downside risk to the warrant holder (minimum value is 0).
• The greater the time to expiration, the greater the opportunity of the upside potential of the stock and the greater the market value of the warrant.

Summary of the Example of Warrant Valuation