Question

A copy of CA 16-3:

For various reasons a corporation may issue warrants to purchase shares of its common stock at specified prices that, depending on the circumstances, may be less than, equal to, or greater than the current market price. For example, warrants may be issued:

1.To existing stockholders on a pro rata basis.

2.To certain key employees under an incentive stock-option plan.

3.To purchasers of the corporation's bonds.

Instructions

(a)

For each of the three examples of how stock warrants are used:

(a)Explain why they are used.

(b)Discuss the significance of the price (or prices) at which the warrants are issued (or granted) in relation to (1) the current market price of the company's stock, and (2) the length of time over which they can be exercised.

(c)

Describe the information that should be disclosed in financial statements, or notes thereto, that are prepared when stock warrants are outstanding in the hands of the three groups listed above.

(AICPA adapted)

Answer 1

To existing shareholders
The main purpose is to lift new equity share capital for issue stock warrants on proportionately basis to existing shareholders to lift new capital.

Method of raising equity could also be used as a result of it's more cost-effective than a public giving and since of primitive rights on a part of share holders of company.

To sure staff beneath incentive option set up.
stock warrants are going to be offered to sure staff like chief operating officer by the corporate within the kind of non qualified option set up so as to extend the financial gain of the corporate and interest in long run growth and to draw in the new management talent

In addition to the current issuing of stock warrants beneath option conceive to staff consistutes a necessary part of government compensation program

To purchasers of company bonds
In order to extend the sale of bonds by stimulating their speculative charm , shares of stock could also be issued to purchasers of company bonds. the employment of warrants may additionally results in allow the sale of bonds at lower interest price.

(b)

Raising of latest equity capital is that the main purpose of issuance warrants to existing shareholders. so as give assurance that shares are going to be exercised the worth such for those bonds should be below the present market value

b two The length of your time over which may be exercised is sixty days

C. financial plan about the outstanding stock warrants issued should disclose within the description of stock being offered purchasable, the period at that those choices are often exercised, the choice value, range of right needed to buy a replacement share.

The following ought to be enclosed in financial plan info about stock warrant.

Status of those plans at the tip of every amount, which incorporates range of shares beneath choice ar exercised and confiscate.

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