Series 7 - General Securities Representative Exam
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HGH corporation had an IPO recently and also issued warrants to early investors in the Pre IPO offering. One of your clients has 100 shares of the stock and 100 warrants. The warrants are exercisable for 1 common stock share at an exercise price of $17.50 if the stock is trading above 20. The stock is currently trading at $20.20 and the warrants are trading at $4.40 on the open market. What would you suggest to your client if he wants to get out of his HGH position?
Exercise the warrants and then sell all shares
A
Exercise the warrants but keep the shares
B
Sell the warrants on the open market and sell the shares
C
Sell the shares but keep the warrants
D
Explanations
The investor wants to get out of his HGH position, so this indicates that he wants to sell all of the holdings. B is out. D is out. The warrants are trading at a premium to their exercise price of 17.50. The warrants are trading at 4.40. If exercised the warrants, he will have stock at 17.50 in exchange for the 4.40 = total 21.90. Since the stock can be bought at $20.20, why would he want to buy it at $21.90? His best choice is to sell the shares and sell the warrants on the open market