Vansteelandt Distillery Inc's warrant is trading for $12.50.The warrant carries the option to purchase two shares of common stock for $50.What is the speculative premium if the stock price is $53.50?

Question

Quizplus · Accepted Answer

To calculate the speculative premium, we need to first calculate the intrinsic value, which is the difference between the current stock price and the exercise price of the warrant.

Intrinsic Value = Current stock price - Exercise price of the warrant
Intrinsic Value = $53.50 - $50
Intrinsic Value = $3.50

Now we can calculate the speculative premium, which is the difference between the market price of the warrant and its intrinsic value.

Speculative Premium = Market price of the warrant - Intrinsic value
Speculative Premium = $12.50 - $3.50
Speculative Premium = $9.00

Therefore, the speculative premium is $9.00, which means that the warrant is trading at a $9.00 premium above its intrinsic value.

The closest answer choice is B) $5.50, but it is incorrect as it does not reflect the correct calculation of the speculative premium.

Vansteelandt Distillery Inc's Warrant Is Trading for $12