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 how much total capital the company will raise as a result of the issuance of debentures with warrants attached (after exercise of the warrants).
A) $100 million
B) $80 million
C) $180 million
D) $20 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 how much total capital the company will raise as a result of the issuance of debentures with warrants attached (after exercise of the warrants).
A) $100 million
B) $80 million
C) $180 million
D) $20 million

Quizplus · Accepted Answer

The company initially raises $100 million from the sale of the debentures. When the warrants are exercised, each warrant allows the holder to buy one share of common stock at $20. With 40 warrants per $1,000 debenture and $100 million of debentures sold, there are 100,000 debentures (since $100 million / $1,000 per debenture = 100,000). This means there are 4 million warrants in total (100,000 debentures * 40 warrants/debenture). If all warrants are exercised, the company will raise an additional $80 million (4 million warrants * $20). Therefore, the total capital raised after the exercise of the warrants is $180 million ($100 million from the debentures + $80 million from the exercise of warrants).

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