FRA

CFA Level I FRA
#1

Consider the following information on the past year’s operating performance and current capital structure for the following two companies:

Supple Moves

Perfect Collection

Paid no dividends

Paid common & pref. div.

Ave. Stock Price of $42.00

Ave. Stock Price of $22.00

Positive net income

Positive net income

110,000 warrants with an exercise price of $50.00

Convertible debt with an 8.0% coupon, conversion ratio at 10.0.

150,000 options outstanding with an exercise price of $19.50

Based on the information above, which of the companies has a complex capital structure?

A) Supple Moves and Perfect Collection. B) Perfect Collection only. C) Supple Moves only.

Please explain how the answer is A. was thinking it should be B since the Average Market Price is greater than the Exercise Price; Thus makes it a dilutive instrument as against when the Average Market Price is lesser than the Exercise Price.

Which means that only perfect Collection has potentially dilutive securities or is there something am missing out?

Feedbacks would be greatly appreciated.

Thanks in advance.

Regards

#2

A company has a complex capital structure if it has potentially dilutive securities. A security is potentially dilutive if it can change the number of common shares outstanding; whether it is actually dilutive doesn’t matter.

In this case, Supple Moves’ warrants are potentially dilutive as exercising them would change the number of shares outstanding. The fact that they turn out to be antidilutive at the moment doesn’t matter; they’re potentially dilutive, so the capital structure’s complex.

#3

Many Thanks S2000

Regards

#4

My pleasure.