On using the black-scholes model to value warrants

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.