Liz Todd has $1,200 to invest in the market. She is considering buying 48 shares of the Eagle Corporation at $25 per share. Her broker suggests she may wish to consider purchasing warrants instead. The warrants are selling for $6, and each warrant allows her to purchase one share of Eagle Corporation common stock at $23 per share.
a. How many warrants can Liz purchase for the same $1,200?
b. If the price of the stock goes to $35, what would be her total dollar and percentage return on the stock?
c. At the time the stock goes to $35, the speculative premium on the warrant goes to zero (though the intrinsic value of the warrant goes up). What would be Liz’s total dollar and percentage return on the warrant?
d. Assuming that the speculative premium remains $4 over the intrinsic value, how far would the price of the stock have to fall before the warrant has no value?

  • CreatedJuly 26, 2013
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