Hi-Tech Ltd. has warrants outstanding that allow the holder to purchase 3 shares of stock for a total of Rs 60 for each warrant. Currently, the…
BBS Fundamentals of Corporate Finance · 2081 · Solved Question with Answer
Hi-Tech Ltd. has warrants outstanding that allow the holder to purchase 3 shares of stock for a total of Rs 60 for each warrant. Currently, the market price per share of Hi-Tech is Rs 18. Investors hold the following probabilistic beliefs about the stock 6 months hence:
| Market price per share | Rs 16 | Rs 18 | Rs 20 | Rs 22 | Rs 24 |
| Probability | 0.15 | 0.20 | 0.30 | 0.20 | 0.15 |
a. What is the present theoretical value of the warrant?
b. What is the expected value of stock price 6 months hence?
c. What is the theoretical value of the warrant 6 months hence?
d. Would you expect the present market price of the warrant to equal its theoretical value? If not, why not?