Asked by Marquel WindyBoy on Jul 03, 2024
Verified
Which of the following statements best describes warrants?
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.
Warrants
Warrants are a type of security that gives the holder the right to purchase a company’s stock at a specific price until the expiration date.
Long-term Call Options
Financial derivatives granting the holder the right, but not the obligation, to buy a security at a fixed price within a specific long-term period.
Exercise Price
The price stated in the option contract at which the security can be bought (or sold). Also called the strike price.
- Acquire knowledge on the foundational aspects and intentions behind convertible securities, warrants, and options.
- Discern the likenesses and discrepancies amongst a variety of financial instruments, namely warrants, convertibles, and options, as well as their contribution to the financial structuring of firms.
Verified Answer
BH
Brieana HayesJul 05, 2024
Final Answer :
B
Explanation :
Warrants are long-term call options that give holders the right to purchase the firm's common stock at a pre-determined exercise price, regardless of how high the market price has risen. Holders can exercise their warrants and buy the stock at the exercise price, then sell it at the higher market price for a profit.
Learning Objectives
- Acquire knowledge on the foundational aspects and intentions behind convertible securities, warrants, and options.
- Discern the likenesses and discrepancies amongst a variety of financial instruments, namely warrants, convertibles, and options, as well as their contribution to the financial structuring of firms.