Jenni Shover, Inc., has warrants outstanding that allow the holder to purchase three shares of common stock for a total $60 for each warrant that is held. Currently, the market price per share of Jenni Shover common stock is $18. However, investors hold the following probabilistic beliefs about the stock six months hence.
|
Market price per share |
$16 |
$18 |
$20 |
$22 |
$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 six months hence?
c. What is the expected theoretical value of the warrant six months hence?
d. Would you expect the present market price of the warrant to equal its theoretical value? If not, why not?