Mercury Inc. issued bonds with warrants attached that had an exercise price of $22. Each warrant allows the holder to purchase two shares. Since the issuance, the stock split 2 for 1, the current stock price is $24 and the warrant price is $30. How much is the warrant selling above its formula value?
A) 84.6%
B) 130.8%
C) 15.4%
D) 269%

Question

Quizplus · Accepted Answer

The formula value of a warrant is calculated as [(Current Stock Price - Exercise Price) x Number of Shares] - Warrant Price. After the stock split, the exercise price adjusts to $11 (since each warrant now allows the purchase of 4 shares at half the original exercise price due to the 2 for 1 split). The formula value is [(24 - 11) x 4] - 30 = $22. The warrant is selling for $30, so it is selling $8 above its formula value. The percentage it is selling above its formula value is ($8 / $22) x 100 = 36.36%. However, none of the options match this calculation, indicating a possible misunderstanding in the calculation process. Re-evaluating the calculation process: The correct calculation should consider the adjusted exercise price and the impact of the stock split correctly. However, given the options and the information provided, the calculation error seems to stem from a misinterpretation of the given answer choices or a mistake in the calculation steps outlined. The correct approach to find the selling price above its formula value involves understanding the impact of the stock split on the exercise price and the number of shares each warrant can purchase, then calculating the intrinsic value of the warrant and comparing it to the market price to find the premium. Without additional information or clarification on the calculation mistake, the correct answer based on the provided choices and the apparent misunderstanding in the calculation is not clearly identifiable from the explanation provided.