Both result in new equity capital although the

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Unformatted text preview: between a warrant and a right should be clear. Both result in new equity capital, although the warrant provides for deferred equity financing. The life of a right is typically not more than a few months; a warrant is generally exercisable for a period of years. Rights are issued at a subscription price below the prevailing market price of the stock; warrants are generally issued at an exercise price 10 to 20 percent above the prevailing market price. Warrants and convertibles also have similarities. The exercise of a warrant shifts the firm’s capital structure to a less highly levered position because new common stock is issued without any change in debt. If a convertible bond were converted, the reduction in leverage would be even more pronounced, because common stock would be issued in exchange for a reduction in debt. In addition, the exercise of a warrant provides an influx of new capital; with convertibles, the new capital is raised when the securities are originally issued rather than when they are converted. The influx of new equity capital resulting from the exercise of a warrant does not occur until the firm has achieved a certain degree of success that...
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This document was uploaded on 01/19/2014.

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