Hans Gruber is evaluating BMW Group’s common stock and warrants to choose the better investment. The company’s stock is currently selling for €94.68 per share, while its warrants to purchase five shares of common stock at €20 per share are selling for €10. Ignoring transaction costs, Mr. Gruber has €10,000 to invest. He is generally optimistic about BMW since the company is investing heavily in new electric cars.

a. Calculate the number of shares of stock and the number of warrants that Mr. Gruber can buy with his funds.

b. Suppose that Mr. Gruber bought the stock, and then sold it after one year for €105.

Ignoring brokerage fees and taxes, what would be his net gain for this transaction?

c. Suppose that Mr. Gruber purchased warrants and held them for one year, and the market price of the stock is still €105. Ignoring brokerage fees and taxes, what would be his net gain if the market value of the warrants increased to €12 and he sold out?

d. What benefit, if any, would the warrants provide? Are there any differences in the risk of these two alternative investments? Explain.