6. Warrants Aa Aa Warrants are long-term options to buy a stated number of commo

Question

6. Warrants Aa Aa Warrants are long-term options to buy a stated number of common shares at a specified price; they are generally attached to debt issues If a warrant-ssuing company declares to distribute dividends on its common shares, and the distribution will be mad before the expiration of its warrants, which of the folilowing investors are eligible to recelve the dividends? O Investors who have exercised their warrants O Investors who have yet to exercise their warrants Consider the case of The Global Group. The company issued warrants that allow holders to purchase two shares of the company's common stock at an exercise price of $19.00 per share. These warrants were issued two years ago and are set to expire on October 1 two years from now Zoya is an analyst who has been tracking The Global Group's market performance and its impact on the equity offerings of the company. She submitted a report in January this year stating that the company's warrants were trading at a price of $6.00 each on January 1. The company's common shares were trading at $22.50 per share on the same day. Analysts expect The Global Group stock price to rise to $26.60 by October 1 two years from now Based on your understanding of warrants, complete the following valuations in Zoya's report Value Formula value of the warrants on January 1 (this year) Formula value of the warrants on October 1 (two years from now) Suppose that on October 1 (two years from now) the warrant is trading at a price of $25.84 per warrant. The premium over the formula value on October 1 will be

Explanation / Answer

1) Warrant Holders are not entitled to any voting or dividend rights. Therefore, only those investors who have exercised their warrants are eligible to receive dividends.

2) Formula Value of Warrant (in case price is greater than exercise price) = (Market Price - Exercise price) x no.of shares received on exercise of warrants

Value on January 1 (this year) = ($22.50 - $19) x 2 = $7

Value on October 1 (two years from now) = ($26.60 - $19) x 2 = $15.2

If trading price is $25.84,

Value = ($25.84 - $19) x 2 = $13.68

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