Hailey has $1,000 to invest in the market. She is considering the purchase of 50 shares of Comet Airlines at $20 per share. Her broker suggests that she may wish to consider purchasing warrants instead. The warrants are selling for $10, and each warrant allows her to purchase one share of Comet Airlines common stock at $18 per share.
a. How many warrants can Hailey purchase for the same $1,000?
b. If the price of the stock goes to $40, what would be her total dollar and percentage return on the stock?
c. At the time the stock goes to $40, the speculative premium on the warrant goes to 0 (though the market value of the warrant goes up). What would be Hailey’s total dollar and percentage returns on the warrant?
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 $40 before the warrant has no value?