Discuss the two alternatives and the dradeoffs associated

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Reference no: EM13260468

Tom Baldwin an invest $6300 in the common stock or the warrants of Lexington Life Insurance. The common stock is currently selling for $30 per share. Its warrants, which provide for the purchase of two shares of common stok at $28 per share, are currently selling for $7. The stock is expected t o rise to a market price of $32 within the next year, so the expected theoretical value of the warrant over the next year is $8. 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 $32, what is his total gain? (Ignore brokerage fees and taxes?
b. If Mr. Baldwin purhases 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 $32? Ignore brokerage fees and taxes)
c. Repeat parts a and b, assuming that the market price of the stock in 1 year is 1. $30 and 2. $28.
d. Discuss the two alternatives and the dradeoffs associated with them.

Reference no: EM13260468

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