In comparison to convertibles, the exercise of a warrant shifts the firm's capital structure to a less highly levered position.

Question

Quizplus · Accepted Answer

When a warrant is exercised, new shares of stock are issued, which increases the number of shares outstanding and dilutes the value of existing shares. This dilution results in a decrease in leverage, as the firm's total value is spread over a larger number of shares, effectively reducing the debt-to-equity ratio. In contrast, a convertible bond allows the bondholder to convert the bond into company stock, without increasing the number of shares outstanding or decreasing debt, which does not change the firm's leverage position.

In Comparison to Convertibles, the Exercise of a Warrant Shifts