Assume in the previous problem that Cable Corp. common stock was selling for $50 per share when
Question:
Assume in the previous problem that Cable Corp. common stock was selling for $50 per share when the Manning Investment Company bought the warrants.
a. What was the intrinsic (minimum) value of a warrant at that time?
b. What was the speculative premium per warrant when the warrants were purchased?
c. What would the Manning Investment Company's total dollar profit or loss have been had it invested the $3,000 directly in Cable Corp.'s common stock one year ago at $50 per share and sold it today at $60 per share?
d. What would the percentage rate of return be on this common stock investment?
Compare this to the rate of return on the warrant investment computed in the previous problem, part b.
Data from Previous Problem
The Manning Investment Company bought 100 Cable Corp. warrants one year ago and would like to exercise them today. The warrants were purchased for $30 each, and they expire when trading ends today (assume there is no speculative premium left). Cable Corp. common stock is selling today for $60 per share. The option price is $36, and each warrant entitles the holder to purchase two shares of stock, each at the option price.
Common StockCommon stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...
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Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta