Article1990

ON USING THE BLACK‐SCHOLES MODEL TO VALUE WARRANTS

24 citations0/0 files storedThe Journal of Financial Research

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Stochastic processes and financial applications Financial Markets and Investment Strategies Financial Reporting and Valuation Research

Abstract

Abstract In this paper ad hoc procedures that employ the Black‐Scholes model in the valuation of warrants are examined. Findings indicate that the Black‐Scholes model unadjusted for either dividends or dilution undervalues out‐of‐the‐money warrants with short expirations. An adjustment for dilution improves the valuation for longer‐term warrants of firms that do not pay dividends. For dividend‐paying firms, findings suggest that it is better to adjust for dividends than for dilution when warrants are in the money or have expirations exceeding four years.

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References

1973The Pricing of Options and Corporate Liabilities 1973Theory of Rational Option Pricing 1977The valuation of warrants: Implementing a new approach 1978PRICING OF WARRANTS AND THE VALUE OF THE FIRM 1981Equilibrium Warrant Pricing Models and Accounting for Executive Stock Options 1984Warrant exercise and bond conversion in competitive markets 1983Warrant valuation and exercise strategy 1988Warrant Exercise, Dividends, and Reinvestment Policy

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