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 formula value of PSW warrants.
A) $0
B) $2
C) $5
D) $11

Question

Quizplus · Accepted Answer

The formula value of a warrant can be calculated as the difference between the market price of the stock and the exercise price of the warrant. In this case, the market price of PSW common stock is $12 and the exercise price is $10, so the formula value of the warrant is $12 - $10 = $2.

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