What is typically true of the exercise price of warrants?

What is typically true of the exercise price of warrants?

• A. It is set below the stock's intrinsic value
• B. It is higher than the current market value of the stock
• C. It matches the historical price of the stock
• D. It has no significance in buying stocks

Answer: (B)

The exercise price of warrants is typically set higher than the current market value of the stock. This is because warrants are issued as a long-term option that gives the holder the right to purchase shares at a specified price, known as the exercise price, usually at or above the current market value at the time of issuance. The rationale behind setting the exercise price above the market price is to incentivize future price appreciation of the underlying stock. If the company's stock performs well and its market price exceeds the exercise price, warrant holders can then profit from exercising their warrants to buy shares at the lower exercise price and selling them at the higher market price. This structure aligns the interests of the warrant holders with the company's growth and performance objectives, encouraging them to drive the stock value up to a point where exercising the warrant becomes financially beneficial.

The exercise price of warrants is typically set higher than the current market value of the stock. This is because warrants are issued as a long-term option that gives the holder the right to purchase shares at a specified price, known as the exercise price, usually at or above the current market value at the time of issuance. The rationale behind setting the exercise price above the market price is to incentivize future price appreciation of the underlying stock. If the company's stock performs well and its market price exceeds the exercise price, warrant holders can then profit from exercising their warrants to buy shares at the lower exercise price and selling them at the higher market price.

This structure aligns the interests of the warrant holders with the company's growth and performance objectives, encouraging them to drive the stock value up to a point where exercising the warrant becomes financially beneficial.