The capital structure of Springmaid Company is as follows:
The company has decided to raise additional capital by selling $100 million of 8% debentures with warrants attached. Each $1000 debenture will have 40 warrants attached, and each warrant will entitle the holder to purchase one share of common stock at $20. Assume that no other changes in the capital structure occur between now and the time the warrants are exercised. Determine the common stock at par account balance after exercise of the warrants.
A) $50 million
B) $54 million
C) $56 million
D) $35 million

Question

The capital structure of Springmaid Company is as follows: 
The company has decided to raise additional capital by selling $100 million of 8% debentures with warrants attached. Each $1000 debenture will have 40 warrants attached, and each warrant will entitle the holder to purchase one share of common stock at $20. Assume that no other changes in the capital structure occur between now and the time the warrants are exercised. Determine the common stock at par account balance after exercise of the warrants.
A) $50 million 
B) $54 million 
C) $56 million 
D) $35 million

Quizplus · Accepted Answer

Solution:
New shares = ($100,000,000/$1,000)(40)(1) = 4,000,000 shares at warrant exercise
Common stock account = $50 million + 4 million shares ($1/ share) = $54 million.

The Capital Structure of Springmaid Company Is as Follows