15. Susan Michaels is evaluating the Burton Tool Company's common stock and warrants to

choose the better investment. The firm's stock is currently selling for $50 per share; its

warrants to purchase three shares of common stock at $45 per share are selling for $20.

Ignoring transaction costs, Ms. Michaels has $8,000 to invest. She is quite optimistic with

respect to Burton because she has certain "inside information" about the firm's prospects with

respect to a large government contract.

A. How many shares of stock and how many warrants can Ms. Michaels purchase?

B. Suppose Ms. Michaels purchased the stock, held it 1 year, and then sold it for $60 per

share. What total gain would she realize, ignoring brokerage fees and taxes?

C. Suppose Ms. Michaels purchased warrants and held them for 1 year and the market price

of the stock increased to $60 per share. Ignoring brokerage fees and taxes, what would be

her total gain if the market value of the warrants increased to $45 and she sold out?

D. What benefit, if any, would the warrants provide? Are there any differences in the risk of

these two alternative investments? Explain.