CFA Practice Question

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CFA Practice Question

BWT Inc. shows the following data in its financial statements at the end of the year. Assume all securities were outstanding at the beginning of the year:

• 6.125% convertible bond, convertible into 33 shares of common stock. Issue price \$1,000, 100 bonds outstanding.
• 6.25% convertible preferred stock, \$100 par, 2,315 shares outstanding. Convertible into 3.3 shares of common stock, issue price \$100.
• 8% convertible preferred stock, \$100 par, 2,572 shares outstanding. Convertible into 5 common shares, issue price \$80.
• 9,986 warrants are outstanding with an exercise price of \$38. Each warrant is convertible into 1 share of common stock.
• Average market price of common stock is \$52.00 per share. Common shares outstanding at the beginning of the year were 40,045.
• Net income for the period was \$200,000 while the tax rate was 40%.

How many new shares had to be issued to facilitate warrant conversion?
A. 2,689
B. 7,297
C. 9,986
Explanation: 9,986 x \$38 = \$379,468 \$379,468/\$52 = 7,297

common shares 9,986 - 7,297 = 2,689 new common shares