Outer Wear has 12,000 shares of stock outstanding.Each share has a .5 warrant attached.These warrants expire today.The market value of the firm's assets net of its debt is $192,000.One new share can be obtained for one warrant plus $18.Assuming all else held constant,what would you expect the market price per share to be tomorrow morning when the stock market opens?
A)$16.67
B)$15.33
C)$16.00
D)$18.00
E)$17.50

Question

Quizplus · Accepted Answer

There are 12,000 shares outstanding and each share has 0.5 warrants attached, so there are a total of 6,000 warrants outstanding.
Assuming all warrants are exercised, the company will issue an additional 6,000 shares.
To exercise a warrant, one must pay $18 plus surrender one warrant for each new share obtained. Thus, the exercise of all warrants will result in a cash inflow of $18*6,000 = $108,000.
The market value of the firm's assets net of its debt is $192,000. With 12,000 shares outstanding before the exercise of warrants, the book value per share is $192,000 / 12,000 = $16 per share.
After issuing an additional 6,000 shares, the book value per share will be ($192,000 + $108,000) / (12,000 + 6,000) = $300,000 / 18,000 = $16.67 per share.
Therefore, we would expect the market price per share to be around $16.67 after the exercise of warrants. Since this is closest to option C ($16.00), C is the best choice.

Outer Wear Has 12,000 Shares of Stock Outstanding