Which of the Following Statements Concerning Warrants Is CORRECT

question 9

Multiple Choice

Which of the following statements concerning warrants is CORRECT?

• A) Warrants are long-term put options that have value because holders can sell the firm's common stock at the exercise price regardless of how low the market price drops.
• B) Warrants are long-term call options that have value because holders can buy the firm's common stock at the exercise price regardless of how high the stock's price has risen.
• C) A firm's investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders.
• D) A drawback to using warrants is that if the firm is very successful, investors will be less likely to exercise the warrants, and this will deprive the firm of receiving any new capital.
• E) Bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock's price increases. However, if the option is exercised, the issuing company's debt declines if warrants were used but remains the same if it used convertibles.

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Definitions:

Historical Cost

is the original monetary value of an asset or investment at the time of its acquisition, without adjustments for inflation or market fluctuations.

Common-Size Balance Sheet

A financial statement that presents all items as percentages of a common base figure rather than absolute numerical figures, facilitating comparison.

Shareholders' Equity

The residual interest in the assets of a corporation that remains after deducting liabilities, representing the ownership interest of shareholders.

Total Assets

The sum of all assets owned by a company, including cash, inventory, property, and intangible assets, represented on the balance sheet.