Question

A corporation is offering a new issue consisting of 100,000 units at $200 each. Each unit consists of 2 shares of preferred stock and a warrant to buy one additional common share. A full warrant allows the purchase of an additional common share at $5. If all the warrants are exercised, the corporation will have:

A. 100,000 preferred shares and 100,000 common shares
B. 200,000 preferred shares and 100,000 common shares
C. 200,000 preferred shares and 50,000 common shares
D. 50,000 preferred shares and 100,000 common shares

Answer 1

B) 200,000 preferred shares and 100,000 common shares

Step-by-step explanation:

Each package includes 2 preferred stocks and the possibility of buying a common stock at a very cheap price, so we can assume that investors will purchase the common stock.

If 100,000 packages are sold:

• 100,000 x 2 preferred stocks per package = 200,000 preferred stocks
• 100,000 x 1 common stock per package = 100,000 common stocks

Answer 2

B. 200,000 preferred shares and 100,000 common shares

Step-by-step explanation:

100,000 units with 2 preferred shares and a warrant for a common shares

if all warrants are exercised then, the company will have 100,000 additional shares as each warrant can potencially convert into a common share.