Which of the Following Statements Concerning Warrants Is CORRECT

question 5

Multiple Choice

Which of the following statements concerning warrants is CORRECT?

• A) 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 are used but remains the same if convertibles are used.
• B) 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.
• C) 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.
• D) 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.
• E) 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.

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Definitions:

Efficiently Allocated

A situation wherein resources are distributed in such a way that maximizes the net benefits gained from their use, leaving no opportunity to make someone better off without making others worse off.

Marginal Cost

The cost incurred from producing one more unit of a good, reflecting changes in production expense with output variation.

Average Variable Cost

The total variable costs (costs that change with the level of output) of production divided by the quantity of output produced.

Industry Expands

The growth phase of an industry characterized by an increase in output, number of producers, or production capacity.