The effect of exercising a warrant on a firm's capital structure ________.
A) reduces leverage less than a converting a convertible security
B) increases leverage as much as a converting a convertible security
C) reduces leverage more than a converting a convertible security
D) is unrelated to a converting a convertible security

Question

Quizplus · Accepted Answer

Exercising a warrant involves the issuance of new shares in exchange for cash, which increases the company's equity. This increase in equity reduces the company's leverage ratio (debt-to-equity ratio) less than converting a convertible security does, because converting a convertible security directly swaps debt for equity, reducing debt and increasing equity simultaneously, which has a more significant impact on reducing leverage.

The Effect of Exercising a Warrant on a Firm's Capital