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

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.
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