Multiple warrant issues: are issue premiums important?

Premiums collected when warrants are issued become part of a firm's capital and are taken into account in the valuation of a company. In this paper formulae are developed to fairly value warrants in the case where multiple warrant issues are outstanding, including consideration of issue premiums collected, extending results in Dayananda and Kemper (2010). The models developed are 'reduced-form' models of the type utilised by Jarrow and Trautmann (2011) and shown to be preferred in Jarrow and Protter (2004). Fair values taking premiums into account are compared with traditional Black-Scholes values and with values that ignore premiums. Comparisons are also made to market prices for a public company with two issues of warrants outstanding. Under conditions generally in effect when multiple issues of warrants exist, the effect of warrant issue premiums may be safely ignored.