The Gifford Investment Company bought 110 Cable Corporation warrants one year ag

Question

The Gifford Investment Company bought 110 Cable Corporation warrants one year ago and would like to exercise them today. The warrants were purchased at $25 each, and they expire when trading ends today. (Assume there is no speculative premium left.) Cable Corporation common stock was selling for $48 per share when Gifford Investment Company bought the warrants. The exercise price is $37, and each warrant entitles the holder to purchase two shares of stock, each at the exercise price.

a. What was the intrinsic value of a warrant at the time of purchase? (Do not round intermediate calculations and round your answer to 2 decimal places.)

b. What was the speculative premium per warrant when the warrants were purchased? The purchase price, as indicated earlier, was $25. (Do not round intermediate calculations and round your answer to 2 decimal places.)

c. What would Gifford’s total dollar profit or loss have been had they invested the $2,750 directly in Cable Corporation’s common stock one year ago at $48 per share? Cable Corporation common stock is selling today for $58 per share. (Do not round intermediate calculations and round your answer to 2 decimal places. Input the dollar amount as a positive value.)

d. What would the percentage rate of return be on this common stock investment? Compare this to the rate of return on the warrant computed when the common stock was selling for $58 per share.

Percentage return on stock…?

Percentage return on Warrants…?

(Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

Explanation / Answer

1. Intrinsic value of stock at the time of purchase

Stock Price- Subscription price of warrant / no of stocks a warrant can buy

48- 25/2 = 35.5 intrinsic value of warrant.

2. Speculative Premium per warrant

Intrinsic Value- option price

35.5-25 = 9.5

3. if $ 2750 had been directly invested in shares

2750 / 48 = 57.29 shares, current value= 57.29 X 58 = $ 3322.92

Total Profit= 3322.92-2750 = $ 572.92

4. % return on stock= profit / Purchase value

572.92 / 2750 = 20.83% return

% return on warrant = price paid for subscription of warrant + exercise price- market value of stocks

110 X 25 + 110 X 37 - 220 X 58 = $ 5,940 or 87 % return

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