- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 18. Understanding Income Statements
- Subject 5. Earnings per Share
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
User Contributed Comments 4
| User | Comment |
|---|---|
| murli | No. of shares required to facilitate the conversion = no. of shares to be issues so that there is DILUTION of EPS. |
| Lamkerst | treasury stock method |
| Lambo83 | Somewhat of a trick question. The actual number of shares to complete the warrant conversion is 9986. After the buy-back there are 2689 additional shares compared to before |
| Inaganti6 | @Lambo83 that's the point. they're not going to ask this otherwise. it's just a way for them to pick your brains. |