Which of the Following Statements Concerning Warrants Is Most CORRECT

question 38

Multiple Choice

Which of the following statements concerning warrants is most 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:

Price-taker Industry

An industry in which individual firms have no control over the price of their product and must accept the market price set by the forces of supply and demand.

Price-taker Industry

An industry in which individual firms have no control over the price of their product; they "take" the market price as given.

Long-run Equilibrium

A state in which all factors of production and costs are variable, and firms no longer have any incentives to enter or exit the market, resulting in an optimal allocation of resources.