Common stock versus warrant investment Tom Baldwin can invest $7,000 in the common stock or the warrants of Lexington Life Insurance. The common stock is currently selling for $70 per share. Its warrants, which provide for the purchase of 4 shares of common stock at $67 per share, are currently selling for $17 The stock is expected to rise to a market price of $72 within the next year, so the expected theoretical value of a warrant over the next year is $20 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 $72, 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 $72? (Ignore brokerage fees and taxes.)

c.Repeat parts a and b, assuming that the market price of the stock in 1 year is $68.

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