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?
A) $15.00.
B) $17.78.
C) $11.11.
D) $20.00.

Question

Quizplus · Accepted Answer

The 40 warrants would be exercised to buy 80 shares at a price of $15 per share, for a total price of $1,200. This means the firm would have a total of 180 shares outstanding. The market value of $2,000 implies a price of $11.11 per share ($2,000/180 shares). However, this price must be adjusted for the dilutive effect of the warrants. Each warrant allows its owner to buy 2 shares at a price of $15 per share, so the owner of each warrant effectively owns 2/(2+1) or 2/3 of a share. The 40 warrants therefore represent an additional 80/3 or 26.67 shares. Adding these to the original 100 shares gives a total of 126.67 shares. The adjusted market value per share is therefore $2,000/126.67 or $15.80 per share.

A Firm Has 100 Shares of Stock and 40 Warrants