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The Cost of Warrants

Published online by Cambridge University Press:  19 October 2009

Harold Bierman Jr.
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Extract

It is likely that warrants will be used increasingly in the future by corporations both as means of sweetening other securities such as preferred stocks and bonds, and as securities in their own right. Many authors have analyzed the characteristics of warrants from the point of view of investors but attempts to develop a procedure for determining the cost to a corporation of issuing warrants have been lacking. We will find it convenient to measure the yield to a corporation of issuing warrants instead of common stock, rather than determining the percentage cost of warrants analogous to the cost of common stock equity, preferred stock, and interest-bearing debt.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 8 , Issue 3 , June 1973 , pp. 499 - 503
Copyright
Copyright © School of Business Administration, University of Washington 1973

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References

1 See Hayes, S. L. III, and Reiling, Henry B., “Sophisticated Financing Tool: The Warrant,” The Harvard Business Review (January–February 1969), pp. 137–150 for further arguments of this position as well as a detailed statement of the analysis of the benefits of warrants. However, Hayes and Reiling do not attempt to determine the cost of warrants to the corporation.Google Scholar

2 For examples of the former see Van Horne, J. C., “Warrant Valuation in Relation to Volatility and Opportunity Costs,” Industrial Management Review (Spring 1969), pp. 19–32Google Scholar, and Cootner, P., The Random Character of Stock Market Prices (Cambridge, Mass.: The MIT Press, 1964) for several relevant articles.Google Scholar