Question: Mr. John Hailey has $1,000 to invest in the market. He is considering the purchase of 50 shares of Comet Airlines at $20 per share. His broker suggests that he may wish to consider purchasing warrants instead. The warrants are selling for $5, and each warrant allows him to purchase one share of Comet Airlines common stock at $18 per share.
a. How many warrants can Mr. Hailey purchase for the same $1,000?
b. If the price of the stock goes to $30, what would be his total dollar and percentage returns on the stock?
c. At the time the stock goes to $30, the speculative premium on the warrant goes to 0 (though the market value of the warrant goes up). What would be Mr. Hailey's total dollar and percentage returns on the warrant?
d. Assuming that the speculative premium remains $3.50 over the intrinsic value, how far would the price of the stock have to fall from $30 before the warrant has no value?