Principles of Managerial Finance, 15th Edition

17.4 Stock Purchase Warrants

1. LG5

Stock purchase warrants are similar to stock rights, which were briefly described in Chapter 7. Stock purchase warrants give their holders the right to purchase a certain number of shares of the issuer’s common stock at a specified price over a certain period of time. Holders of warrants earn no income until they exercise or sell their warrants. Warrants also bear some similarity to convertibles in that they provide for the injection of additional equity capital into the firm at some future date.

Key Characteristics

Firms often attach warrants to debt issues as “sweeteners.” When a firm sells a large bond issue, the attachment of stock purchase warrants may add to the marketability of the issue and lower ...