Q2BP Quantum Inc. has warrants outsta... [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: 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

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

Step 3:Analysis

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