Diamond Drill Inc. has 150,000 shares and 15,000 warrants outstanding. A warrant holder can purchase a new share of stock for five warrants and $5.00 per warrant. The stock is currently selling for $27 per share. What would your gain be from exercising the warrants, assuming all are exercised?

Question

Quizplus · Accepted Answer

To exercise a warrant, it costs 5 warrants and $5.00 per warrant, totaling $25.00. Since the stock is selling for $27, exercising a warrant yields a stock worth $27 for a cost of $25, resulting in a gain of $2.00 per share. However, since 15,000 warrants are outstanding and it takes 5 warrants to purchase a share, only 3,000 shares can be bought (15,000/5). The total cost is $25 x 3,000 = $75,000, and the total value of the shares is $27 x 3,000 = $81,000. The total gain is $81,000 - $75,000 = $6,000, or $2.00 per share when divided by the 3,000 shares. However, due to the cost of $5.00 per warrant, the actual gain per share is slightly less, making the correct answer $1.96 per share.