Reference no: EM132012393

Mr. John Hailey has $2,400 to invest in the market. He is considering the purchase of 40 shares of Comet Airlines at $60 per share. His broker suggests that he may wish to consider purchasing warrants instead. The warrants are selling for $15, and each warrant allows him to purchase one share of Comet Airlines common stock at $55 per share.

a. How many warrants can Mr. Hailey purchase for the same $2,400? (Do not round intermediate calculations and round your answer to the nearest whole number.)

b. If the price of the stock goes to $80, what would be his total dollar and percentage return on the stock? (Do not round intermediate calculations. Round the first answer to the nearest whole dollar. Input the second answer as a percent rounded to 2 decimal places.)

c. At the time the stock goes to $80, the speculative premium on the warrant goes to 0 (though the market value of the warrant goes up). What would be Mr. Hailey’s total dollar and percentage returns on the warrant? (Do not round intermediate calculations. Round the first answer to the nearest whole dollar. Input the second answer as a percent rounded to 2 decimal places.)

d. Assuming that the speculative premium remains $3.50 over the intrinsic value, how far would the price of the stock have to fall from $80 before the warrant has no value? (Do not round intermediate calculations and round your answer to 2 decimal places.)