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Chapter 5: Q10DQ (page 622)

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

Short Answer

Expert verified

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

Step by step solution

01

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.

02

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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Most popular questions from this chapter

Explain the role of financial intermediaries in the flow of funds through the three-sector economy.

Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

a. Compute the net proceeds to Tyson Iron Works.

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