Question: Assume in Problem that Cable Corporation common stock was selling for $50 per share when Gifford Investment Company bought the warrants.
a. What was the intrinsic value of a warrant at that time?
b. What was the speculative premium per warrant when the warrants were purchased? The purchase price, as indicated above, was $30.
c. What would Gifford's total dollar profit or loss have been had they invested the $3,000 directly in Cable Corporation's common stock one year ago at $50 per share? Recall the current value is $60 per share.
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 in Problem 17 b.
Problem: The Gifford Investment Company bought 100 Cable Corporation warrants one year ago and would like to exercise them today. The warrants were purchased at $30 each, and they expire when trading ends today. (Assume there is no speculative premium left.) Cable Corp. common stock is selling today for $60 per share. The exercise price is $36, and each warrant entitles the holder to purchase two shares of stock, each at the exercise price.
a. If the warrants are exercised today, what would Gifford's total profit or loss be?
b. What is Gifford's percentage rate of return?