Common stock versus warrant investmentPersonal Finance ProblemTom Baldwin can invest $3,000 in the common stock or the warrants of Lexington Life Insurance. The common stock is currently selling for $55 per share. Its warrants, which provide for the purchase of 3 shares of common stock at $52 per share, are currently selling for $14.

The stock is expected to rise to a market price of $57 within the next year, so the expected theoretical value of a warrant over the next year is

$15.

The expiration date of the warrant is 1 year from the present.

a.If Mr. Baldwin purchases the stock, holds it for 1 year, and then sells it for $57, what is his total gain? (Ignore brokerage fees and taxes.)

b.If Mr. Baldwin purchases the warrants and converts them to common stock in 1 year, what is his total gain if the market price of common shares is actually $57? (Ignore brokerage fees and taxes.)

c.Repeat parts a and b, assuming that the market price of the stock in 1 year is $54.

d. Discuss the two alternatives and the trade-offs associated with them.