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.
-Refer to the above scenario.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

Each warrant can be exchanged for one-fifth of a share with a cost of $5. Thus, the total value of one warrant is $1 ($5/5), and the total value of all warrants is $15,000 (15,000 warrants x $1 per warrant). If all warrants were exercised, the number of outstanding shares would increase by 3,000 (15,000/5), resulting in a total of 153,000 shares (150,000 + 3,000). So, the conversion price of the bond is $40 ($1,000 face value bond/25 shares).