Answer (A) is correct . Warrants are long-term options that give holders the right to buy common stock in the future at a specific price. If the market price goes up, the holders of warrants will exercise their rights to buy stock at the special price. If the market price does not exceed the exercise price, the warrants will lapse. Issuers of debt sometimes attach stock purchase warrants to debt instruments as an inducement to investors. The?investor then has the security of fixed-return debt plus the possibility for large gains if stock prices increase significantly. If?warrants are attached, debt can sell at an interest rate slightly lower than the market rate.
Answer (B) is incorrect because Outstanding warrants dilute earnings per share. They are included in the denominator of the EPS calculation even if they have not been exercised.
Answer (C) is incorrect because Warrants can, if exercised, result in a dilution of management’s holdings.
Answer (D) is incorrect because A?call provision in a bond indenture, not the use of warrants, permits the buyback of bonds.
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