Question

How are warrants used in corporate finance? Explain what you have found through your readings and research.

Answer 1

Warrants are basically options issued by a firm and it gives the buyer the right to purchase the firm's stock at a given price in a specified period. Warrants are traded in exchange. Warrants that grant the right to sell the underlying security (Bond/stock) are called put warrants whereas the warrants that give the right to buy the underlying security are called call warrants

There are many uses of Warrants in Corporate finance, some of them are:

1. Warrants are basically a source of financing a company. It's a way to attract more investors.
2. As warrants don't pay dividends or don't give any voting rights to the investor. It gives investors to hedge the risk and also provide higher returns.
3. Warrants are very liquid securities and the buyer can very easily sell these warrants
4. The exercise price of warrants are usually set very high and act as a motivating factor for investors to make the company successful to gain higher returns
5. Also, help the companies at times of bankruptcy and becomes a source of capital in future for the company.