The exercise of warrants creates new shares which:
A) Increases the total number of shares but does not affect share value.
B) Increases the total number of shares that reduces the individual share value.
C) Does not change the number of shares outstanding similar to options.
D) Increases share value because cash is paid into the firm at the time of warrant exercise.

Question

Quizplus · Accepted Answer

When warrants are exercised, new shares are created, which increases the total number of shares of the company. This increase in shares dilutes the ownership of existing shareholders and reduces the earnings per share, which in turn reduces the individual share value. Therefore, the correct option is B. Option A is incorrect because the exercise of warrants does affect the share value. Option C is incorrect because the exercise of warrants does result in the creation of new shares. Option D is incorrect because the cash paid at the time of exercise does not necessarily increase the share value.

The Exercise of Warrants Creates New Shares Which