Final answer:
The value of a warrant depends on the difference between the market value per share and the exercise price of the warrant. In this case, the market value per share after all warrants are exercised is $17, which is less than the $25 exercise price, resulting in no intrinsic value for the warrant. Nonetheless, the time value could still provide some value to the warrant depending on market conditions.
Step-by-step explanation:
The value of a warrant can be understood by considering the rights it confers to the holder, mainly the right to purchase stock at a predetermined price, which in this case is $25 per share for 5 shares. To calculate the warrant's value, you need to first determine the total market value of the firm, which is the market value of the firm's assets minus the market value of its debt. With a market value of assets at $25,000 and debt at $8,000, the equity value of the firm is $17,000.
After the warrants are exercised, there will be an additional 100 warrants × 5 shares/warrant = 500 shares, bringing the total shares to 1000. Assuming the market value of the firm remains constant, each share will then be worth $17,000 / 1000 shares = $17. Since each warrant allows buying shares at $25, the warrant will have intrinsic value if the market value per share exceeds the exercise price of $25.
In this scenario, the market value per share after exercise ($17) is less than the exercise price ($25), so the warrant would have no intrinsic value. However, warrants can still have time value (which isn't calculated here), especially if there is volatility and the expectation that the share price could rise above the exercise price before expiration.