Company Z issued bonds with detachable warrants several years ago. Each warrant allows the holder to purchase one share of stock at $30 per share. The stock has a beta of 1.3.
a. Calculate the exercise value of the warrants if the price of the underlying stock is $35.
b. How much would an investor likely be willing to pay for the warrant over and above its exercise value? Why?
c. Would the investor likely be willing to pay more or less for the warrant if the stock had a beta of 1.0? Why?
d. Is a warrant more similar to a call option or a put option? Why?
e. Why might an investor prefer to buy warrants rather than the underlying stock?