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. The holder of a $1,000 face value bond can exchange the bond any time for 25 shares of stock. The conversion price is:

Question

Quizplus · Accepted Answer

The total number of shares that can be purchased with warrants = 15,000 warrants * (1 new share of stock/5 warrants) = 3,000 new shares of stock.
The total number of shares outstanding if all warrants are exercised = 150,000 shares + 3,000 new shares = 153,000 shares.
For a bondholder to exchange the bond for 25 shares of stock, the conversion price would be $1,000 face value bond/25 shares = $40 per share.