Question

Westover Industries has 60,000 shares outstanding. Each share has one-third of a warrant attached. One warrant plus $25 can be exchanged for one new share of stock. The stock is currently selling for $27 per share. All else held constant, what will the stock price be if all the warrants are exercised? Multiple Choice $27.00 $25.00 $26.50 $26.67

Answer 1

Option C: $26.50

Explanation

Number of shares outstanding = 60,000

Each share has 1/3 warrants attached so total warrants attached to the shares outstanding = Number of shares outstanding * 1/3

= 60000/3

= 20000

So, if warrants are exercised, total number of new shares that will be received in exchange is 20,000 shares.

Total number of shares outstanding if all warrants are exercised = 60,000 + 20,000 = 80,000 shares

To exchange a warrant for a share, one needs to pay an additional amount of $25 per share. Therefore, total capital inflow if all warrants are exchanged = $25 * 20,000 = $5,00,000. So the market capitalization of the firm will increase by $500000 if all warrants are exercised.

Initial Market Capitalization = Share Price * Number of shares outstanding = $27 * 60,000 =$16,20,000

Market Capitalization if warrants are exercised = $5,00,000 + $16,20,000 = $21,20,000

So, Stock price if all warrants are exercised = Market Capitalization if all warrants are exercised/ Total number of Shares Outstanding if all warrants are exercised

= $21,20,000/80,000

=$26.5