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Basic Question 37 of 40
The exercise of warrants creates new shares, which increases ______
B. the total number of shares, which reduces individual share value.
C. share value because cash is paid into the firm at the time of warrant exercise.
A. the total number of shares but does not affect share value.
B. the total number of shares, which reduces individual share value.
C. share value because cash is paid into the firm at the time of warrant exercise.
User Contributed Comments 8
| User | Comment |
|---|---|
| surob | why it reduces the individual share value |
| eb2568 | because each share will have less earnings tied to it and thus the share price should lower accordingly. i think it may be assuming that the P/E ratio stays the same too. but in general. if earnings decrease the stock value should decrease with it, and vice versa. |
| xjarl | I can see that they're getting at B as the right answer.. but in real life the warrants would be factored in when pricing the stock in the first place, so shouldn't affect share price. |
| Drzewes | xjarl, what you're saying is efficient market theory - they have already affected share price with the probability of being exercised. If the probability reaches 1 then exercising warrants will have absolutely no effect on share prices. However they will have effect on value which may be perceived as price but may also be perceived as book value. |
| bundy | dilutive to EPS |
| jonan203 | xjarl, if that was always true, arbitrage would not be possible. |
| johntan1979 | I guess share value here means EPS |
| farhan92 | denominator increases so numerator increases. |
You have a wonderful website and definitely should take some credit for your members' outstanding grades.
Colin Sampaleanu
Learning Outcome Statements
describe how earnings per share is calculated and calculate and interpret a company's basic and diluted earnings per share for companies with simple and complex capital structures including those with antidilutive securities
CFA® 2024 Level I Curriculum, Volume 2, Module 2.