Fred Jury Is a Portfolio Manager Who Has $900,000 of a Client's

question 101

Essay

Fred Jury is a portfolio manager who has $900,000 of a client's money to invest in highly speculative instruments. Jury is contemplating the purchase of 40,000 shares of Shakee Corp. common stock, which is currently selling on the American Stock Exchange at $30.00 per share. Alternatively, he could buy warrants on Shakee Corp. common stock for $5.50. Each warrant gives the holder the right to buy one share of Shakee Corp. common stock at $24.00 per share.
a) How many warrants could Mr. Jury buy with the $900,000?
b) If he had purchased the common stock directly, and its price had increased to $37.20 per share, calculate his dollar and percentage return on the investment.
c) Assume that when the price of the stock goes to $37.20 per share, the warrant sells for its intrinsic value. If Jury sells his warrants at this point, calculate his dollar and percentage return on the investment.