# Hailey has \$1,000 to invest in the market. She is considering the purchase of 50 shares of Comet Airlines at

## Question:

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?

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Related Book For

## Foundations Of Financial Management

ISBN: 9781264097623

18th Edition

Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen

Question Details
Chapter # 19- Convertibles, Warrants, and Derivatives
Section: Problem
Problem: 19
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