Final answer:
i. Theoretical value: RM8
ii. Warrant premium: RM2
iii. The holder should exercise the warrant as it offers a discount of RM6 compared to buying shares directly from the market at RM14.
iv. If the share price drops to RM13 while the premium remains the same, the market price of the warrant will likely decrease due to the reduced potential profit margin for warrant holders.
v. Di...
Explanation:
The theoretical value of the warrant can be calculated by subtracting the exercise price from the current market price of the shares: RM14 - RM10 = RM4 per share. Since the warrant allows the holder to buy two shares at RM4 each (2 units x RM4), the theoretical value is RM8.
The warrant premium is the difference between the market price of the warrant and its theoretical value: RM3 - RM1 = RM2. This represents the additional cost per warrant above its intrinsic value.
The holder should exercise the warrant because buying two shares through the warrant at RM10 costs RM20, while buying them directly from the market at RM14 each would cost RM28. Thus, exercising the warrant provides a discount of RM8, making it a favorable option.
If the share price drops to RM13 while the warrant premium remains unchanged, the attractiveness of the warrant decreases as the potential profit margin reduces. This situation could lead to a decrease in the market price of the warrant due to diminished profit potential for warrant holders.