Final answer:
The effective exercise price of a warrant is calculated by adding the actual exercise price to the decrease in the value per share after the exercise. In this case, the effective exercise price is $5.18 per warrant.
Step-by-step explanation:
The student has asked about calculating the effective exercise price of a warrant. To find the effective exercise price, we need to determine the total market value of the firm after all warrants are exercised. Initially, there are 2,000 shares and the market value of the firm's assets is $14,000, so each share is initially worth $7 ($14,000 / 2,000 shares).
When the 200 warrants are exercised, another 200 shares will be bought at $5 per share, bringing in $1,000 ($5 x 200) additional capital to the firm and increasing the total number of shares to 2,200. The new market value of the firm is $15,000 ($14,000 + $1,000). The value of each share after the exercise is approximately $6.82 ($15,000 / 2,200 shares), which is lower than the initial share value because more shares are now available.
The actual amount paid for exercising a warrant ($5) plus the drop in value per share ($7 - $6.82 = $0.18) gives us an effective exercise price of $5.18 ($5 + $0.18) per warrant.