What effect does the trend in stock prices (subsequent to issue) have on a firm’s ability to raise funds through:  (a) convertibles

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What effect does the trend in stock prices (subsequent to issue) have on a firm’s ability to raise funds through:  (a) convertibles

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What effect does the trend in stock prices (subsequent to issue) have on a firm’s ability to raise funds through:
(a) convertibles

What effect does the trend in stock prices (subsequent to issue) have on a firm’s ability to raise funds through:
(b) warrantsv

Explanation & AnswerSolution by a verified expert

Explanation

When a company issues convertible securities, there are no new funds added to the capital structure of a firm because it only converts the company's debt into equity. Since the funds are now available in the form of stocks, the stock price is bound to get influenced whether or not the conversion takes place. This change in the stock price is based upon whether the issue of convertibles is treated as good or bad by the investors.

Verified Answer

The stock price will get influenced if the company issues convertibles because it makes the company to issue debt at a lower cost and decrease the value of debt in its capital structure at the time of conversion.

 
 

b) warrants

Explanation

When a company issues warrants, the company is supposed to receive additional funds by the investors if the stock price increases. This happens because when the stock price increases by level wherein the conversion value is higher than the value of the underlying debt security, then exercising the warrant is profitable for the investors. Thereafter, the company receives new funds. However, if the stock price does not rise but rather falls below the strike price, then the investors will not exercise the option and the company will not receive additional funds.

Verified Answer

If the stock price increases subsequent to issue, the investors will exercise their option in case of warrants and the firm will receive additional funds at the strike price.

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