The exercise price of The American Dairy Company is $17.You purchase the warrants for $4.00 each when American Dairy's stock price is $20.00 a share.Each warrant entitles you to purchase one share of ADC stock.Calculate your percentage gain assuming the warrant premium drops by 50% and you sell your warrants when the stock reaches $30.00 per share.
A) 37.5%
B) 87.5%
C) 137.5%
D) 237.5%
E) 337.5%

Question

Quizplus · Accepted Answer

V = ($20.00 - $17.00)= $3.00 theoretical value
$4.00 - $3.00 = $1.00 premium
V = ($30.00 - $17.00)= $13.00 theoretical value
V = $13.00 + $0.50 = $13.50 actual value
(13.50 - 4)/4 = 9.50/4 = 237.5%

The Exercise Price of the American Dairy Company Is $17