April 2008 exam, question 5

[DA Taylor]

This question asks how much money the company receives from the exercising of 500 000 warrants at a strike price of 2 pounds. My answer was 1 million pounds but the correct answer is nil.

Doesn't this contradict the notes on page 29 of chapter 4? The notes say that "When they are exercised the company issues more of its own shares and sells them to the option holder for the strike price." Doesn't this imply that money changes hands?

 

[DevonMatthews]

This question asks how much money the company receives from the exercising of 500 000 warrants at a strike price of 2 pounds. My answer was 1 million pounds but the correct answer is nil.

Doesn't this contradict the notes on page 29 of chapter 4? The notes say that "When they are exercised the company issues more of its own shares and sells them to the option holder for the strike price." Doesn't this imply that money changes hands?

Lol this question wrecked my head also,

If the share price actually hit 2.00 then yes, they would receive a million pond. I Feel this question is worded very terribly, because if the question says how much are they likley to receive from the EXCERCISE of the warrants, it is implying the shareprice has hit 2.00, because if the shareprice didnt hit 2 dollars, the warrants are out of the money and are completley worthless and no one would excercise them and they would expire. I think if the warrants are close to expirey, and the share price is 1.90, market forces wouldnt allow the share price to hit 2.00 while the warrants are still live because of the dilutive effect on the current equity holders holding, so the shareprice would be unlikley to rise over 2.00 and so the company is likley to receive nothing.. This question was a complete shocker