A ﬁrm has 100 shares of equity and 40 warrants outstanding.The warrants are about to expire, and all of them will be exercised.The market value of the ﬁrm's assets is €2,000, and the ﬁrm has no
Debt.Each warrant gives the owner the right to buy 2 shares at €15 per share.What is the price per
Share of the equity?
A)€11.11
B)€15.00
C)€17.78
D)€20.00
E)None of the above.

Question

Quizplus · Accepted Answer

Since each warrant gives the right to buy 2 shares at €15 per share, a total of 80 shares will be bought for €1,200 when all the warrants are exercised. This leaves 20 shares of equity for the remaining 20 shares. Thus, the value of each share of equity is:
(Value of assets - Value of warrants) / Number of shares
= (€2,000 - €1,200) / 20
= €40 / 20
= €2
Therefore, the price per share of equity is €2. Multiplying this by the number of shares (100) gives a total value of €200 for the equity. 
Thus, the price per share of equity after the warrants are exercised is:
= Total value of equity / Number of shares
= €200 / 100
= €2. 
Adding the €15 per share that was paid for exercising the warrants, the total value is €17 per share. Therefore, the correct choice is C.

A ﬁRm Has 100 Shares of Equity and 40 Warrants