have just bought a warrant that entitles you to purchase two shares of common
stock for $45. The market price of the common stock is $26 per share, whereas
the market price of the warrant is $10 in excess of its theoretical value. One
year later the common stock has risen in price to $50 per share. The warrant
now sells for $2 more than its theoretical value.
a. If the
common stock paid $1 in dividends for the year, what is the return on
investment in the common stock?
b. What is
the return on investment in the warrant?
c. Why do
the two rates of return differ?
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