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 contributed capital in excess of par account balance after exercise of the warrants.
A) $250 million
B) $330 million
C) $254 million
D) $326 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 contributed capital in excess of par account balance after exercise of the warrants.
A) $250 million
B) $330 million
C) $254 million
D) $326 million

Quizplus · Accepted Answer

The contributed capital in excess of par will increase by $76 million after the exercise of the warrants. Each warrant allows the purchase of one share at $20, and there are 40 warrants per $1,000 debenture, with $100 million of debentures issued. This means 100,000 debentures are issued (since $100 million / $1,000 per debenture = 100,000 debentures), leading to 4 million warrants (100,000 debentures * 40 warrants/debenture). When exercised at $20 each, this raises $80 million ($20 * 4 million warrants), which increases the common stock par value by $4 million (since 4 million shares * $1 par value/share = $4 million) and the contributed capital in excess of par by $76 million ($80 million raised - $4 million added to common stock). Therefore, the new balance in the contributed capital in excess of par account is $326 million ($250 million original + $76 million from warrants).

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