On November 2, 2003, Finsbury, Inc. issued warrants to its stockholders, giving them the right to purchase additional $20 par value common shares at a price of $30.
The stockholders exercised all warrants on March 1, 2004. The shares had market prices of $33, $35, and $40 on November 2, 2003, December 31, 2003, and March 1, 2004, respectively.
What were the effects of the warrants on Finsbury's additional paid-in capital and net income?
The effects of the warrants on Finsbury's additional paid-in capital and net income are as follows:
1. Additional Paid-in Capital: When the warrants were issued, they provided the stockholders with the right to purchase additional common shares at a price of $30. However, since the market price of the shares at the time of issuance was higher than the exercise price, the warrants have an intrinsic value. The intrinsic value is the difference between the market price and the exercise price. In this case, the intrinsic value of the warrants is $33 - $30 = $3.
Therefore, the total additional paid-in capital resulting from the issuance of the warrants is the intrinsic value multiplied by the number of warrants exercised. If all warrants were exercised, the additional paid-in capital would be $3 multiplied by the number of warrants exercised.
2. Net Income: The issuance and exercise of the warrants do not directly impact the net income of Finsbury. Net income is calculated based on the company's revenue and expenses and is not affected by the issuance of securities like warrants.
In conclusion, the effect of the warrants on Finsbury's additional paid-in capital would be an increase by the intrinsic value of the warrants multiplied by the number of warrants exercised, and there would be no direct effect on the net income.