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Common stock versus warrant investment Personal Finance Problem Tom Baldwin can invest $7,000 in the...

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Finance

Common stock versus warrant investment Personal Finance Problem Tom Baldwin can invest $7,000 in the common stock or the warrants of Lexington Life Insurance. The common stock is currently selling for $55 per share. Its warrants, which provide for the purchase of 2 shares of common stock at $49 per share, are currently selling for $15. The stock is expected to rise to a market price of $61 within the next year, so the expected theoretical value of a warrant over the next year is $24. The expiration date of the warrant is 1 year from the present.

a. If Mr. Baldwin purchases the stock, holds it for 1 year, and then sells it for $61, what is his total gain? (Ignore brokerage fees and taxes.)

b. If Mr. Baldwin purchases the warrants and converts them to common stock in 1 year, what is his total gain if the market price of common shares is actually $61? (Ignore brokerage fees and taxes.)

c. Repeat parts a and b, assuming that the market price of the stock in 1 year is $55.

d. Discuss the two alternatives and the trade-offs associated with them.

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