A warrant carries an option to purchase two shares at $35. The warrant's minimum value is determined to be $25. At what price is this company's common stock currently trading?

Question

Quizplus · Accepted Answer

To find the current price of the common stock, we can use the minimum value of the warrant and the option price:

Minimum value of warrant = current share price - option price 
$25 = current share price - $35 
Current share price = $25 + $35 = $60

However, we need to account for the fact that the warrant allows the holder to purchase two shares at $35 each. So the effective price paid for each share is:

Option price = $35 for 2 shares = $17.5 per share

Using this adjusted option price, we can calculate the current share price:

Minimum value of warrant = current share price - option price 
$25 = current share price - $17.5 
Current share price = $25 + $17.5 = $42.5

However, this is the price for one share. The warrant allows the holder to purchase two shares, so the effective price paid for both shares is $35. Therefore, we need to adjust the current share price accordingly:

Adjusted current share price = ($42.5 + $35) / 2 = $38.75

Therefore, the best choice is C) $47.5, since it is the closest option price to our calculated share price.

A Warrant Carries an Option to Purchase Two Shares at $35