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IAI Actuarial Core Principles · Business Finance · Financial instruments issued or used by companies

Which statement about warrants issued by a company on its own shares is correct?

When warrants issued by a company are exercised, the holder pays the exercise price to the company and receives newly issued shares. This raises cash but increases the share count, diluting existing shareholders.

  1. AExercise brings new cash into the company and increases the number of shares in issueCorrect
  2. BExercise reduces the number of shares in issue
  3. CExercise brings no cash into the company because the holder pays the existing shareholders
  4. DWarrant holders receive dividends before exercise
  5. Warrants are issued by stock exchanges, not companies

Explanation

When a company's own warrants are exercised, the holder pays the exercise price to the company and new shares are issued, so cash comes in and dilution occurs. Holders have no shareholder rights such as dividends before exercise.

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