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Kent Hotels has warrants that allow the purchase of three shares of its outstanding common stock at $50 per share. The common stock price per share and the market value of the warrant associated with that stock price are shown in the table.
a. For each of the common stock prices given, calculate the theoretical warrant value.
b. Graph the theoretical and market values of the warrant on a set of axes with per share common stock price on the x axis and warrant value on the y axis.
c. If the warrant value is $12 when the market price of common stock is $50, does this contradict or support the graph you have constructed? Explain.
d. Specify the area of warrant premium. Why does this premium exist?
e. If the expiration date of the warrants is quite close, would you expect your graph to look different?Explain.
Assuming that the S&P 500 had simply continued to earn the average return from (a),calculate the amount that $100 invested at the end of 1925 would have grown to by the end of 2008.
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