CFA Practice Question

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CFA Practice Question

The exercise of warrants creates new shares, which increases ______

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.
Correct Answer: B

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.
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