Which of the Following Statements Concerning Warrants Is Correct

question 13

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:

Conjunction Fallacy

A logical fallacy that occurs when people assume that specific conditions are more probable than a single general one.

Base Rate Fallacy

A cognitive error where people wrongly judge the likelihood of a situation by ignoring general statistical information and focusing on specific information.

Gambler's Fallacy

The erroneous belief that if something happens more frequently than normal during a given period, it will happen less frequently in the future, or vice versa.

Overestimation Fallacy

The cognitive bias of overestimating one's own abilities, performance, level of control, or chances of success.