| Abstract: | Stock warrants are often portrayed as securities that yield supernormal returns while their counterpart stocks only earn moderate yields. Those returns seem inconsistent with efficient capital markets. A present-value warrant model is developed in this paper. This model assumes that warrants grow at a rate appropriate to their risk class. The model suggests that warrant values vary directly with growth of the stock and the time remaining to exercise, and vary inversely with the warrant holder's cost of capital. |
