Red Herring Pizza has outstanding warrants, where each warrant entitles the holder to purchase two shares of stock at $24 per share. The market price per share of stock and market price per warrant were the following over the last year:
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OBSERVATION |
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1 |
2 |
3 |
4 |
5 |
6 |
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Stock price |
$20 |
$18 |
$27 |
$32 |
$24 |
$38 |
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Warrant price |
5 |
3 |
12 |
20 |
8 |
29 |
Determine the theoretical value per warrant for each of these observations. Then plot the market value per warrant in relation to this theoretical value. At what price per common share is the warrant premium over theoretical value the greatest? Why?