Question

The Redford Investment Company bought 120 Cinema Corp. warrants one year ago and would like to exercise them today. The warrants were purchased at $29 each, and they expire when trading ends today (assume there is no speculative premium left). Cinema Corp. common stock is selling today for $60 per share. The exercise price is $39 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 the Redford Investment Company’s dollar profit or loss be? (Do not round intermediate calculations. Input your dollar answer as a positive value rounded to the nearest whole dollar.)
  

Profit of

b. What is the Redford Investment Company’s percentage rate of return? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Rate of return

%

Answer 1

a. Intrinsic value of the warrant = [(selling price of common stock - exercise price) x no. of shares entitled to purchased
= [($60 - 39) x 2] = $42

Amount obtained from sales/Revenue = Intrinsic value x no. of warrants purchased
= $42 x 120 = $5,040

Purchase price = price of single warrant x  no. of warrants purchased
= $29 x 120 = $3,480

Profit = Amount obtained from sales - Total purchase price
= $5,040 - 3,480 = $1,560

b. Percentage rate of return = Profit amount / Total purchase price
= $1,560 / $3,480
= 0.448 or 44.8%