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What does the exercise of a stock warrant entail?

Answer :

Final answer:

The exercise of a stock warrant allows an investor to purchase stock at a predetermined price. If this price is below the current market value, exercising the warrant can lead to a capital gain upon selling the stock. This functions as one form of return on investment, the other being dividends.

Explanation:

When investors are considering the exercise of a stock warrant, they are looking at an opportunity to purchase the company's stock at a predetermined price within a certain time frame. The exercise of a stock warrant translates into buying the stock at the exercise price. When the market price of the stock is above the exercise price, exercising the warrant allows the investor to buy the stock at a discount to the current market price, potentially leading to a capital gain.

For example, if an investor holds a warrant to buy shares of Wal-Mart at $45, and the current market price is $60, exercising the warrant would mean purchasing the stock at $45 and if the investor sells immediately at market price, they would realize a capital gain of $15 per share. This capital gain is the increase in the stock value from the time of purchase to the time of sale. Hence, the exercise of a stock warrant can be a lucrative venture for an investor if the stock's market price is higher than the exercise price of the warrant.

It is important to remember that in addition to capital gains, investors can also earn returns through direct payments called dividends, which is the other form of rate of return provided by firms to their shareholders.

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