The Ogden Company has warrants outstanding that entitle the holder to purchase 4 shares of the company's common stock at an exercise price of $20 per share. The market price of the warrants is $30, and the common stock price is $25. Determine the premium over the formula value that the warrants are selling for.
A) $20
B) $25
C) $10
D) $30

Question

Quizplus · Accepted Answer

To find the formula value of the warrants, we can use the following formula:

Formula Value per Warrant = (Market Price of Common Stock - Exercise Price per Share) / Number of Warrants Required to Purchase One Share

Formula Value per Warrant = ($25 - $20) / 4 = $1.25

Now, to find the premium over the formula value, we can simply subtract the formula value from the market price of the warrants:

Premium over Formula Value = Market Price of Warrants - Formula Value per Warrant

Premium over Formula Value = $30 - $1.25 = $28.75

Therefore, the premium over the formula value that the warrants are selling for is $28.75, which is closest to $10, making choice C the correct answer.

The Ogden Company Has Warrants Outstanding That Entitle the Holder