Which of the Following Statements Concerning Warrants Is CORRECT

question 18

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 were used but remains the same if it used convertibles.
• 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.

Learn about the price elasticity of supply and how it is calculated.

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Comprehend the long-run and short-run elasticity differences for demand and supply.

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Definitions:

Fixed Period

A specified duration of time during which certain conditions or rules are applied or must be followed.

Costs

Expenses incurred in the production and distribution of a product or in the provision of a service.

Option to Abandon

A business decision tool that allows a company to cease investment in a project if it no longer becomes financially viable.

Discounted Cash Flow Analysis

Discounted Cash Flow (DCF) Analysis is a method used to estimate the value of an investment based on its expected future cash flows, adjusted for the time value of money.