The Redford Investment Company bought 100 Cinema Corp. warrants one year ago and

Question

The Redford Investment Company bought 100 Cinema Corp. warrants one year ago and would like to exercise them today. The warrants were purchased at $28 each, and they expire when trading ends today (assume there is no speculative premium left). Cinema Corp. common stock is selling today for $57 per share. The exercise price is $35 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.)

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.)

Explanation / Answer

As each warrant allows purchase of 2 shares so 100 warrants would allow purchase of 100*2=200 shares

Profit=200*(57-35)-100*28=1600
Rate of return=1600/(100*28)=57.1429%

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