John and Randy form a company with assets worth $900. They each have two shares of stock. The ﬁrm sells Cheri a warrant for one share of stock. The warrant has an exercise price of $200 and
Expires in one year. In one year, the ﬁrm's assets are worth $1,200 immediately before expiration of
The warrant. Should Cheri exercise the warrant?

Question

Quizplus · Accepted Answer

Cheri should exercise the warrant because the firm's assets are worth $1,200, and the exercise price is $200. Exercising the warrant allows her to buy a share worth $300 (since $1,200/4 shares = $300 per share) for $200, resulting in a gain of $100 - $200 = $80.

John and Randy Form a Company with Assets Worth $900