3. Warrants Aa Aa E Warrants are long-term options to buy a stated number of com

Question

3. Warrants Aa Aa E Warrants are long-term options to buy a stated number of common shares at a specified price that is generally attached to debt issues. Warrants give bond investors the chance to profit from the firm's upside potential, leading some to compare warrants to a long-term call option. However, some factors distinguish warrants from call options. Which of the following statements about their differences is correct? O Exercising call options can lead to the dilution of existing shareholders' value. Exercising warrants can lead to the dilution of existing shareholders' value. Triptych Food Corp. is issuing new 19-year bonds with 31 warrants attached to each $1,000 par value bond. Triptych Food Corp. wanted to issue the bonds at par, but a straight-debt bond (without warrants) would have required a 11.20% coupon rate. Instead, the attached warrants allow Triptych Food Corp. to issue the bonds at par with a 6.72% coupon. Calculate the straight value of the bond and the value of each warrant in the following table. (Note: Assume that the company pays annual coupons.) Value What is the straight value of the bond? What is the value of each warrant?

Explanation / Answer

ANSWER:-

1). Exercising warrants can lead to dilution of existing shareholders value.

3). Large, mature firms are the only firms having capacity to issue bonds wjth attached warrants.

4). The preceeding statement is true.

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