Why should investors be concerned about a firm’s outstanding warrants and convertibles?

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Why should investors be concerned about a firm’s outstanding warrants and convertibles?

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Why should investors be concerned about a firm’s outstanding warrants and convertibles?

Explanation & AnswerSolution by a verified expert

Explanation

The exercise of warrants and convertibles dilutes the share of earnings to existing shareholders because of the increase in the number of common stock shares once exercised.
 
In the case of convertibles, the number of shares will increase and share in earnings by existing shareholders will decrease. Only convertible securities that would dilute (decrease) the EPS will be of concern to the investors.

Verified Answer

Existing common shareholders should be concerned about warrants and convertibles because their share in the earnings of the firm will be diluted by the exercise of warrants or conversion of convertibles.

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