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.

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Definitions:

Buyer

An individual or organization that purchases goods or services for personal use, resale, or production.

Purchase

The act of acquiring goods or services in exchange for money, signaling a transfer of ownership.

Assumptive

Pertaining to something that is taken for granted or accepted as true without proof.

Trial

A process of testing or experimenting with a product, service, or idea to evaluate its effectiveness or market potential before full-scale launch.