Q1BP Preston Toy Co. has warrants out... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 5: Q1BP (page 623)

Preston Toy Co. has warrants outstanding that allow the holder to purchase a share of stock for $22 (exercise price). The common stock is currently selling for $28, while the warrant is selling for $9.25 per share.
a. What is the intrinsic (minimum) value of this warrant?
b. What is the speculative premium on this warrant?

Short Answer

Expert verified

Answer

Intrinsic (minimum) value of this warrant is $6.
Speculative premium on this warrant is $3.25

Step by step solution

Computation of intrinsic (minimum) value of this warrant-

$I n t r i n s i c v a l u e = (M a r k e t v a l u e o f c o m m o n s t o c k - E x e r c i s e p r i c e o f w a r r a n t) 脳 N u m b e r o f s h a r e s e a c h w a r r a n t h o l d e r t o p u r c h a s e = ($ 28 - $ 22) 脳 1 = $ 6$

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 r i n s i c v a l u e = $ 9.25 - $ 6 = $ 3.25$

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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鈥檚 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	\(7,600,000
Stockholder鈥檚 claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder鈥檚 claims	\)900,000
Total liabilities and stockholder鈥檚 claims	$8,500,000

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Short Answer

Step by step solution

Computation of intrinsic (minimum) value of this warrant-

Computation of speculative premium-

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