Rick Thompson is considering the following two alternatives for investing in Davis Industries whose stock is now selling for $44 per share: 1)   Either buy 500 shares of stock,       or, 2)   Buy four-month call options on the stock with an exercise price of 45 for a $3.25 call premium. If Rick purchases shares of stock, assuming no commissions or taxes, what is his annualized percentage rate of return if the stock reaches $50 in four months? If Rick purchases call options, assuming no commissions or taxes, what is his annualized percentage rate of return if the stock reaches $50 in four months?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Rick Thompson is considering the following two alternatives for investing in Davis Industries whose stock is now selling for $44 per share:

1)   Either buy 500 shares of stock,

      or,

2)   Buy four-month call options on the stock with an exercise price of 45 for a $3.25 call premium.

If Rick purchases shares of stock, assuming no commissions or taxes, what is his annualized percentage rate of return if the stock reaches $50 in four months?

If Rick purchases call options, assuming no commissions or taxes, what is his annualized percentage rate of return if the stock reaches $50 in four months?

 

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