### What is formula value of each warrant under given conditions

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Five years ago, in conjunction with a financial restructuring, Laurenberg Electric sold a \$100 million issue of bonds at a coupon interest rate of 12 percent. Each bond came with 30 detachable warrants. Each warrant entitled the holder to purchase one share of Laurenberg's common stock at \$15 per share. The warrants were set to expire 25 years from the date of issue. When Laurenberg's stock sold for \$7 per share, the value of a warrant in the marketplace was \$0.50.

a. What is the formula value of each warrant under these conditions?

b. What factors influence this value?
At a stock price of \$15, the market price of each warrant was \$3. At a stock price of \$20, the market price of each warrant was \$6.50. At a stock price of \$25, the market price of each warrant was \$10.50.

c. If an investor purchases the stock and the warrant when the stock price is \$15, what rate of return will be earned on both, assuming that the stock and the warrant are sold when the stock price reaches \$20?

d. If an investor purchases the stock and the warrant when the stock price is \$20, what rate of return will be earned on both, assuming that the stock and the warrant are sold when the stock price reaches \$25?

e. What happens to the rate of return from the warrant as the stock price rises? Why do you think this happens?

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