On February 24, BMC Company purchased 4,000 shares of Winn Corp.'s newly issued 6 percent cumulative $75 par preferred stock for $304,000. Each share carried one detachable stock warrant entitling the holder to acquire at $10 one share of Winn no-par common stock. On February 25, the market price of the preferred stock ex-warrants was $72 per share, and the market price of the stock warrants was $8 per warrant. On December 29, BMC sold all the stock warrants for $41,000. The gain on the sale of the stock warrants was

Question

Quizplus · Accepted Answer

First, we need to calculate the cost of the preferred stock without the stock warrants.
The total cost of the preferred stock is $304,000, so the cost per share is:
$304,000 / 4,000 shares = $76 per share

Since the preferred stock is cumulative, it will receive a dividend of:
6% x $75 par value = $4.50 per share

The dividend for 1 year on the preferred stock would be:
$4.50 x 4,000 shares = $18,000

Therefore, the cost of the preferred stock without the stock warrants is:
$304,000 - $18,000 = $286,000

Next, we need to calculate the cost of the stock warrants. Each preferred share has one detachable stock warrant, so BMC has 4,000 stock warrants.

The cost of the preferred shares without the stock warrants is $286,000, which means the cost of the stock warrants is:
$304,000 - $286,000 = $18,000

Based on the market prices given, we can calculate the intrinsic value of the stock warrants:
Intrinsic value = Market price of common stock - Exercise price of stock warrant
Intrinsic value = $72 - $10 = $62 per warrant

So, the total intrinsic value of the stock warrants is:
$62 per warrant x 4,000 warrants = $248,000

BMC sold the stock warrants for $41,000, which means they gained:
$41,000 - $18,000 = $23,000

Therefore, the gain on the sale of the stock warrants was:
$23,000 intrinsic gain + $9,000 time value gain = $32,000

$32,000 is the gain on the sale of all the stock warrants, which means the gain per warrant is:
$32,000 / 4,000 warrants = $8 per warrant

Since the stock warrants were purchased for $10 each, the gain per warrant is:
$10 - $8 = $2 per warrant

Finally, we multiply the gain per warrant by the number of warrants sold to get the total gain on the sale of the stock warrants:
$2 per warrant x 4,000 warrants = $8,000

Therefore, the gain on the sale of the stock warrants was $8,000. The answer is D.

On February 24, BMC Company Purchased 4,000 Shares of Winn