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The RJN Corporation has issued warrants where each warrant offers the holder the right to purchase one share of RJN's common stock for $20 per share. The warrants are exercisable anytime within the next five years. Chelsea purchases 80 warrants for $2 each. Three years after the purchase, the market price of RJN common stock has risen to $25 per share. Chelsea exercises the warrants and immediately sells the RJN stock at the market price. The result of these transactions is that Chelsea has realized
A) a net short-term capital gain of $400.
B) a net long-term capital gain of $400.
C) a net long-term capital gain of $240.
D) a net short-term capital gain of $240.

Respuesta :

The result of these transactions is that Chelsea has realized  net long-term capital gain of $240.

Capital gain is the increase in the value of an asset after the asset has been bought. It was the price at the time the asset was bought is lower than the value of the asset at the time it is sold. Capital gain is determined by subtracting the purchase price of the asset from the selling price of the asset.

Types of capital gain

  1. Short-term capital gain: it is the gain realised on an asset that is held for less than a year
  2. Long-term capital gain: it is the gain realised on an asset that is held for more than a year.

Chelsea's net long-term capital gain: 80 x {$25 - ($20 + $2)] = $240.

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