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# How does a firm’s dividend policy affect each of the following? c. The likelihood that its warrants will be exercised

 ▲ 0 ▼ ♥ 0 How does a firm’s dividend policy affect each of the following? a. The value of its long-term warrants How does a firm’s dividend policy affect each of the following? b. The likelihood that its convertible bonds will be converted How does a firm’s dividend policy affect each of the following? c. The likelihood that its warrants will be exercised

Explanation

The value of the long term warrants is dependent upon the growth rate of a company, because if the company grows at a slow rate, then the stock price will not increase much, compared to the increase in the stock price, when the growth rate is higher.  The growth rate of a company is dependent upon the dividend policy of a company, which determines the amount of funds that the company will put back into the business. Thus, with a higher dividend payout ratio, both retention rate and growth rate will be lower, which will put a barrier on the increase in stock price. On the contrary, with a low dividend payout and a high retention rate, the amount put back into the business will be more, which will increase both growth rate and stock price.

If the dividend payout ratio of a company is lower, then the value of the long-term warrants will be higher and vice versa.

Explanation

The value of a convertible is dependent upon the dividend policy of a company to a large extent. This is because the likelihood of a convertible to get converted into the company’s common equity is more, when the dividend payout ratio is increased, when the value of the convertible is lower than the conversion value. Similarly, if the value of the convertible is higher than the conversion value and even though the dividend payout is higher, the probability that the convertible will convert is lower because the stock price goes down when the dividends are announced.

When the convertible’s conversion value is higher than the value of the convertible, and dividend is raised, the probability of conversion is increased. Vice versa, when the conversion value is lower than the value of the convertible and dividend is decreased, the probability of conversion is decreased.

Explanation

The value of a warrant is dependent upon the dividend policy of a company to a large extent. This is because the likelihood of a warrant to be exercised is more when the dividend payout ratio is increased at the time when the value of the warrant is lower than the exercise price.If the value of the warrant is higher than the strike price and even though the dividend payout is higher, the probability that the warrant will be exercised is lower because the stock price goes down when the dividends are announced.