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)$11.11
B)$15.00
C)$17.78
D)$20.00
E)None of the above.

Question

Quizplus · Accepted Answer

First, let's calculate the number of shares once all the warrants are exercised: 40 x 2 = 80 shares
This means the total number of outstanding shares will be 100 + 80 = 180 shares

Next, let's calculate the value of the firm's equity (since it has no debt): $2,000

We can set up an equation to represent the value of the firm's equity:
Value of equity = (price per share x number of outstanding shares) + (warrant strike price x number of warrants)

We know the warrant strike price is $15 and each warrant gives the owner the right to buy 2 shares, so we can calculate the value of the warrants:
Value of warrants = $15 x 40 x 2 = $1,200

Substituting the values we have:
$2,000 = (price per share x 180) + $1,200

Solving for the price per share:
(price per share x 180) = $800
price per share = $800/180
price per share = $4.44 (before warrants are exercised)

Since each warrant gives the owner the right to buy 2 shares at $15 per share, once all the warrants are exercised, the firm will receive $15 x 40 x 2 = $1,200. This means the value of the firm's equity will increase to $2,000 + $1,200 = $3,200.

Using the same equation as before:
$3,200 = (price per share x 180) + $0
(price per share x 180) = $3,200
price per share = $3,200/180
price per share = $17.78

Therefore, the price per share of the stock is $17.78. The correct answer is C.

A Firm Has 100 Shares of Stock and 40 Warrants