People Southwest Airlines (PSW) has warrants outstanding that have an exercise price of $10. Each warrant entitles the holder to purchase one share of PSW common stock. Last week PSW common stock was selling for $12 per share, and at the same time, the warrants traded at $5 each. Determine the warrant's premium over the formula value.

Question

Quizplus · Accepted Answer

The formula value of the warrant can be calculated as follows: 
Formula value = PSW stock price - Exercise price 
= $12 - $10 
= $2 
The warrant's premium can be calculated as follows: 
Premium = Market price of warrant - Formula value 
= $5 - $2 
= $3 
Therefore, the warrant's premium over the formula value is $3, and the correct choice is C.

People Southwest Airlines (PSW) Has Warrants Outstanding That Have an Exercise