The Gifford Investment Company bought 70 Cable Corporation warrants one year ago
ID: 2802781 • Letter: T
Question
The Gifford Investment Company bought 70 Cable Corporation warrants one year ago and would like to exercise them today. The warrants were purchased at $28 each, and they expire when trading ends today. (Assume there is no speculative premium left.) Cable Corporation common stock was selling for $47 per share when Gifford Investment Company bought the warrants. The exercise price is $36, 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 $28. (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 $1,960 directly in Cable Corporation’s common stock one year ago at $47 per share? Cable Corporation common stock is selling today for $57 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 $57 per share. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
The Gifford Investment Company bought 70 Cable Corporation warrants one year ago and would like to exercise them today. The warrants were purchased at $28 each, and they expire when trading ends today. (Assume there is no speculative premium left.) Cable Corporation common stock was selling for $47 per share when Gifford Investment Company bought the warrants. The exercise price is $36, 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 $28. (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 $1,960 directly in Cable Corporation’s common stock one year ago at $47 per share? Cable Corporation common stock is selling today for $57 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 $57 per share. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
Explanation / Answer
a. What was the intrinsic value of a warrant at the time of purchase?
Intrinsic value = (Market price- Exercise price)*no of shares purchased
Intrinsic value= (47-36)*2 = $22
b. What was the speculative premium per warrant when the warrants were purchased? The purchase price, as indicated earlier, was $28.
Speculative premium= Purchase price-Intrinsic value = $28-$22= $6
c. What would Gifford’s total dollar profit or loss have been had they invested the $1,960 directly in Cable Corporation’s common stock one year ago at $47 per share? Cable Corporation common stock is selling today for $57 per share
Number of shares= 1960/47= 41.7 or 42 shares approx
Profit per share= $57-$47=$10
Totyal profit= $10*42= $420
d. What would the percentage rate of return be on this common stock investment?
sale= 24*70=$1680
purchase= 28*70= $1960
Los= $280
Rate of return= (280/1960)*100 = 14.29%
Compare this to the rate of return on the warrant computed when the common stock was selling for $57 per share.
sale= 57*70= $3990
Purchase= $1960
profit= $2030
Rate= (2030/1960)*100= 103.57%
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