The Burma Hat Company's warrant is trading for $10.20.The warrant carries the option to purchase two shares of common stock for $48.What is the speculative premium if the stock price is $51.30?

Question

Quizplus · Accepted Answer

To calculate the speculative premium, we first need to calculate the intrinsic value of the warrant, which is the difference between the warrant's exercise price and the current stock price multiplied by the number of shares per warrant.

Intrinsic value = (Stock price - Exercise price) x Number of shares per warrant
Intrinsic value = ($51.30 - $48) x 2
Intrinsic value = $6.60

Next, we subtract the intrinsic value from the market price of the warrant to get the speculative premium:

Speculative premium = Market price - Intrinsic value
Speculative premium = $10.20 - $6.60
Speculative premium = $3.60

Therefore, the speculative premium is $3.60, which is option B.

The Burma Hat Company's Warrant Is Trading for $10