A firm has warrants outstanding that allow the holder to buy one share of stock at $25 per share. Also, assume the stock is selling for $30 per share, and the warrants are now selling for $7 per warrant (this, of course, is above intrinsic value). You can invest $1,000 in the stock or the warrants (for purposes of the computation, round to two places to the right of the decimal point). Assume the stock goes to $40, and the warrants trade at their intrinsic value when the stock goes to $40. Would you have a larger total dollar profit by initially investing in the stock or the warrants?
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