The capital structure of Springmaid Company is as follows: $$\begin{array} { l r }
\text { Long-term debt } & \$ 400 \text { million } \
\text { Common stock, } \$ 1 \text { par } & 50 \text { million } \
\text { Contributed capital in excess of par } & 250 \text { million } \
\text { Retained earnings } & 600 \text { million } \
\text { Total } & \$ 1,300 \text { million }
\end{array}$$ ? The company has decided to raise additional capital by selling $100 million of 8% debentures with warrants attached. Each $1,000 debenture will have 40 warrants attached, and each warrant will entitle the holder to purchase one share of common stock at $20. Assume that no other changes in the capital structure occur between now and the time the warrants are exercised. Determine the common stock at par account balance after exercise of the warrants.
A) $50 million
B) $54 million
C) $56 million
D) $35 million

Question

The capital structure of Springmaid Company is as follows: $$\begin{array} { l r } 
\text { Long-term debt } & \$ 400 \text { million } \
\text { Common stock, } \$ 1 \text { par } & 50 \text { million } \
\text { Contributed capital in excess of par } & 250 \text { million } \
\text { Retained earnings } & 600 \text { million } \
\text { Total } & \$ 1,300 \text { million }
\end{array}$$ ? The company has decided to raise additional capital by selling $100 million of 8% debentures with warrants attached. Each $1,000 debenture will have 40 warrants attached, and each warrant will entitle the holder to purchase one share of common stock at $20. Assume that no other changes in the capital structure occur between now and the time the warrants are exercised. Determine the common stock at par account balance after exercise of the warrants.
A) $50 million
B) $54 million
C) $56 million
D) $35 million

Quizplus · Accepted Answer

The $100 million of debentures will not change the common stock at par account directly. However, when the warrants are exercised, new common stock will be issued. With 40 warrants per $1,000 debenture and $100 million in debentures, there are 100,000 debentures (since $100 million / $1,000 per debenture = 100,000). This means there are 4 million warrants in total (40 warrants * 100,000 debentures). When these warrants are exercised, 4 million new shares of common stock will be issued. Since the par value is $1 per share, this will add $4 million to the common stock at par account, increasing it from $50 million to $54 million.

The Capital Structure of Springmaid Company Is as Follows ? the Company Has Decided to Raise Additional Capital by