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Please explain the basic characteristics of preferred stock, warrants, and convertible debt, how these can be...

Please explain the basic characteristics of preferred stock, warrants, and convertible debt, how these can be viewed as providing both a comparable basic investment and an option, and how these additions or benefits impact the cost of capital for the issuing company.

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Expert Solution

Preffered Stock

Preffered stocks are called hybrid instruments because they have the characteristics of both bonda and stocks. Like stocks they participate in the profit sharing of the company and also receive timely dividends before regular shareholder are paid.

So in a way preffered stock provide chance to earn capital appreciation in stocks with timely dividend payments proving a basic Investment function and option.

Convertible Debt

Convertible debt are like basic debt instruments which are entitled to interest payments with principal just like loans with option to convert them into a specific number of shares as stated in the bond covenant under specific circumstances

Thus providing a basic Investment as well as option

Warrants

A warrant provides you a right to purchase a ceratain amount of shares at a specific time in future. Hence if the price of shares increases, the price of warran also increases. Hence providing Investment and option function.

As the three instruments provide benefits to investors, the issue company has to pay less cost of capital hence they reduce the cost of capital.

I hope this helps

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jeff jeffy answered 2 years ago
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