# Computing the cost basis of converting trading warrants to common stock

I received a Voluntary Warrant Exercise offer to convert 15 warrants to common shares at \$11.50 per share for a total cost of \$173.

The warrants held were trading at \$18 each with a cost basis of \$32 for a total cost of \$480. Taking the offer appeared to offer some relief on the current loss. Not fully understanding the accounting and/or the rationale of the process, I agreed to act on the offer.

Merrill's agent advised me that I would have to pay an additional \$173 plus a \$30 fee for a total of \$203. Thinking that the funds would be reversed at the completion of the conversion, I agreed and provided the additional funds. Today's Gain/Loss statement shows my cost basis per share is \$43 per share for a total cost of \$649.

In retrospect, I could have sold the warrants at market at \$18 each and taken my loss. Then I could have purchased the common at \$30 for a cost basis of \$30 each. Can you help and explain the accounting and was the conversion handled properly.

It has been a really long time since I've dealt with warrants. I did a lot of IPO's in the late 90's that were a combination of common and one or more warrants - so take this with a grain of salt.

There are some rounding errors in your calculations. And the \$32 and \$30 cost per share of the common is confusing - it throws the comparison off. I'm going to use \$32 throughout.

Your cost warrant basis is \$172.50 (15 x \$11.50).

Your purchase price of the common is \$32 for a total of \$480.

Therefore, the cost basis per share is \$43.50 (compared to \$43) and the total cost basis is \$652.50 (compared to \$649).

The one glaring issue that I see is that your warrants were trading below intrinsic value. Therefore, selling them at that price would not have been a good idea since you would have had to pay more for the exercise. At \$32 they should have been worth \$20.50 apiece (compared to \$18):

(15 * \$18) - (15 * \$32) = \$210 (compared to \$172.50).

To make the comparison simpler, I ignored the \$30 commission.

Call your broker and ask for a better explanation and post some feedback if you get one.