Common stocks versus warrant investment Tom Baldwin can invest $6,300 in the common stock or the warrants of Lexington Life Insurance. The common stock is currently, selling for or $30 per share. Its warrants, which provide for the purchase of two shares of common stock at $28 per share, are currently selling for $7. The stock is expected to rise to a market price of $32 within the next year, so the expected theoretical value of a warrant over the next year is SS. The expiration date of the war-rant is 1 year from the present.
a. If Mr. Baldwin purchases the stock, holds it for I year, and then sells it for $32, what is his total gain?
b. if Mr. Baldwin purchases 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?
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 trade-offs associated with them.