Tom Baldwin can invest

$6 comma 3006,300

in the common stock or the warrants of Lexington Life Insurance. The common stock is currently selling for

$3030

per share. Its warrants, which provide for the purchase of

22

shares of common stock at

$2828

per share, are currently selling for

$77.

The stock is expected to rise to a market price of

$3232

within the next year, so the expected theoretical value of a warrant over the next year is

$88.

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

$3232,

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

$3232?

(Ignore brokerage fees and taxes.)c.Repeat parts a and

b,

assuming that the market price of the stock in 1 year is (1)

$3030

and (2)

$2828.

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

a. If Mr. Baldwin purchases the stock, holds it for 1 year, and then sells it for

$3232,

his total gain is

$.

(Round to the nearest dollar.)b.If Mr. Baldwin purchases the warrants and converts them to common stock in 1 year, his total gain if the market price of common shares is actually

$3232

is

$.

(Round to the nearest dollar.)c. (1) If the market price of the stock in 1 year is

$3030,

Mr. Baldwin's total gain or loss from purchasing the stock is

$.

(Round to the nearest dollar. Enter a negative number for a loss.)If the market price of the stock in 1 year is

$3030,

Mr. Baldwin's total gain or loss from purchasing the warrants is

$.

(Round to the nearest dollar. Enter a negative number for a loss.)(2) If the market price of the stock in 1 year is

$2828,

Mr. Baldwin's total gain or loss from purchasing the stock is

$.

(Round to the nearest dollar. Enter a negative number for a loss.)

If the market price of the stock in 1 year is

$2828,

Mr. Baldwin's total gain or loss from purchasing the warrants is

$.

(Round to the nearest dollar. Enter a negative number for a loss.)

d. Discuss the two alternatives and the trade-offs associated with them.(Select the best answer below.)

A.

Warrants increase the possibility for gain and loss. The leverage associated with warrants results in higher risk as well as higher expected returns.

B.

Warrants increase the possibility for gain and loss. The leverage associated with warrants results in lower risk as well as lower expected returns.

C.

Warrants decrease the possibility for gain and loss. The leverage associated with warrants results in lower risk as well as higher expected returns.

D.

Warrants decrease the possibility for gain and loss. The leverage associated with warrants results in higher risk as well as higher expected returns.