Which of the Following Statements Is Correct

question 56

Multiple Choice

Which of the following statements is correct?

• A) A warrant is basically a long-term option that enables the holder to sell common stock back to the firm at an agreed upon price,at a specified time in the future.
• B) Generally,warrants are distributed along with preferred stock in order to make the preferred stock less risky.
• C) If a company issuing coupon paying debt wanted to reduce the cash outflows associated with the coupon payments,it could issue warrants with the debt to accomplish this.
• D) One of the disadvantages of warrants to the issuing firm is that they can be detachable and can be traded separately from the debt with which they are issued.
• E) Warrants are attractive to investors because when they are issued with stock,investors receive dividends on the warrants they own as well as on the underlying stock.

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Definitions:

WACC

Weighted Average Cost of Capital; the average rate of return a company is expected to pay to all its security holders to finance its assets.

Par Value

The face value of a bond or stock as stated on the certificate or instrument, which differs from its market value.

WACC Calculation

The process of calculating the Weighted Average Cost of Capital, which measures a firm's cost of capital from all sources, weighted according to the proportion of each capital component.

Annual Coupons

The interest payments made to bondholders annually over the life of the bond.