Omniscient Inc., a producer of Telescopes and Binoculars, has a total of 400,000 shares of stock outstanding. The current market value of Omniscient is $12 million and it has zero debt in its capital structure. It issues a total of 40,000 warrants (exercise price of $40) to its CEO as incentive compensation.
a) What is the price per share of Omniscient’s stock before the warrants were issued?
b) By how much should the market value of Omniscient increase before the CEO can exercise the warrants?
c) Suppose that the market value of Omniscient increases to $20 million, and then all the warrants are exercised. (Note: The $20 million market value is before the exercise of the warrants.)
(i) What is the new price per share of Omniscient Stock?
(ii) What is the total gain for the CEO?
(iii) Instead of warrants, now assume that the CEO holds 40,000 call options (that someone gave as a gift) with all the other characteristics held the same. What would be the share price after the exercise of the options? What is the total gain for the CEO?