A firm has 100 shares of stock 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 stock after dilution?
A) $15.00
B) $17.78
C) $11.11
D) $20.00

Question

Quizplus · Accepted Answer

Before the warrants are exercised, the firm has 100 shares. When all 40 warrants are exercised, each warrant converts into 2 shares, resulting in 80 additional shares (40 warrants * 2 shares/warrant = 80 shares). This means the total number of shares after the warrants are exercised will be 180 shares (100 original shares + 80 new shares from warrants).The exercise of the warrants brings in additional money to the firm. Since each warrant allows the purchase of 2 shares at $15 per share, the total amount of money brought in is $1,200 (40 warrants * 2 shares/warrant * $15/share = $1,200).The new market value of the firm's assets after the warrants are exercised is the original market value plus the money brought in from the warrants, which is $3,200 ($2,000 original market value + $1,200 from warrants).The price per share after dilution is the new market value of the firm's assets divided by the total number of shares, which is $17.78 per share ($3,200 / 180 shares).

A Firm Has 100 Shares of Stock and 40 Warrants