On January 1, 2005, Del Rio Corporation has the following bonds outstanding: 800

Question

On January 1, 2005, Del Rio Corporation has the following bonds outstanding:

800, 4.5%, semi-annual, $1,000 par bonds with detachable stock warrants. Each warrant authorizes the holder to purchase 6 shares of $1 par common stock at $12 per share.

700, 3.8%, semi-annual, $1,000 par, convertible bonds; each bond is convertible into 25 shares of $1 par common stock.

On October 1, 2005, 30% of the bond warrants are exercised and 60% of the convertible bonds are converted to common stock. The company already has properly accrued its semi-annual interest and amortization and paid the interest that was due on July 1.

Review of the company

Explanation / Answer

The exercise of warrants is a liability for the company and it increases the potential capital base. Warrants will impact the diluted Earning per share of the company. Bond conversion have the same effect on the financial statement and it will also impact the potential earning and diluted earning per share.

Warrants will increase the capital base of common stock by (800*30% = 240*6 = 2040*12=24480 ) and reduces the expenses on bond interest. Unamortized bond issue cost will be written off, Bond conversion will increase the capital base by(700*60%= 420*25= 10500*1 =10500).

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