Question

All of the following are motivation for firms to issue warrants EXCEPT: 23 Multiple Choice 8 0:20:47 o Word Warrants are more desirable than convertible securities for creating new common stock o Warrants are used as a sweetener during merger negotiations Firms may be allowed to issue debt at a lower rate when warrants are included o All of these options are motivations to issue warrants

Answer 1

Answer:

warrrents are more desirable than convertible securities for creating new common stock.

Explanation:

The exercise of a warrant changes the capital structure of the company by reducing the degree of leverage by virtue of the issuance of new common shares without the debt experiencing any change. If a bond is converted, the decrease in the level of leverage would be even more pronounced, as common shares would be issued in exchange for a reduction in debt. In addition, the exercise of a warrant represents a new capital inflow; With convertible securities, new capital is captured when they are originally issued and not when they are converted. The entry of new contribution capital resulting from the exercise of a warrant does not occur until the company has achieved a certain degree of success, which is reflected in a higher price of its shares.

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