The Burma Hat Company's warrant is trading for $10.20. The warrant carries the option to purchase two shares of common stock for $48. What is the speculative premium if the stock price is $51.30?

Question

Quizplus · Accepted Answer

To calculate the speculative premium, we first need to find the intrinsic value of the warrant. The intrinsic value is the difference between the warrant's exercise price and the current stock price multiplied by the number of shares the warrant entitles us to purchase.

Intrinsic value = (Stock price - Exercise price) x Number of shares
Intrinsic value = ($51.30 - $48) x 2 = $6.60

The warrant is trading for $10.20, so we can find the speculative premium by subtracting the intrinsic value from the warrant price.

Speculative premium = Warrant price - Intrinsic value
Speculative premium = $10.20 - $6.60 = $3.60

Therefore, the answer is B, $3.60.

The Burma Hat Company's Warrant Is Trading for $10