- CFA Exams
- CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 21. Understanding Income Statements
- Subject 7. 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, 3,710 shares outstanding. Convertible into 3.3 shares of common stock, issue price $100, 8%
- Convertible preferred stock, $100 par, 5,604 shares outstanding. Convertible into 5 common shares, issue price $80.
- 12,380 warrants are outstanding with an exercise price of $40. Each warrant is convertible into 1 share of common stock.
- Average market price of common stock is $53.00 per share. Common shares outstanding at the beginning of the year were 45,888.
- 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. 12,380
B. 9,343
C. 3,037
Explanation: (12,380)(40) = $495,200
$495,200/$53 = 9,343 common shares
12,380 - 9,343 = 3,037
$495,200/$53 = 9,343 common shares
12,380 - 9,343 = 3,037
User Contributed Comments 9
| User | Comment |
|---|---|
| gene80 | Anyone care to explain these in simple words? |
| Bibhu | Its talking about only warrant conversion. That 12380 warrants to be converted with an exercise price of 40$, where as market price is $53. So no of shares = (53-40)/53 * 12380= 3037. |
| octavianus | This is the Treasury Stock method |
| mordja | The firm gets $495,200 from warrant holders. It uses the money to buy 9343 common shares from the market. It needs to issue another 3037 to make it 12380 shares. |
| jainrajeshv | What i understood that company will issue all the new shares only. Treasury Stock method is a just to calculate the Diluted EPS only. Am I wrong? Please reply |
| Saibot | mordja, thats the explanation i was looking for, thank you |
| czar | Mordja! thank you!! |
| Sam123456 | How many shares due to options/warrants exercised? # of Shares of options/warrants = S K = exercise price M = Market Price S - S x K/M Works everytime! |
| Inaganti6 | How are you all conceiving the question properly ? The NET RESULT of the Treasury Stock method is what they should get at. I knew how to get the answer they were asking but I thought it was asking for initial issue. God I think I overthink . |