Stock Warrant: Say ABC Company
STOCK WARRANTS
INTRODUCTION
A stock warrant gives the right but not the obligation to purchase the stock of a company at a specific price and date. Some of the characteristics are:
Whenever such a warrant is exercised, the shares that fulfil the obligation are not received from another investor but directly from the company.
Firms generally issue stock warrants for raising money through equity and is usually offered at a lower price in comparison to stock options.
There is no lock-in period for buying a warrant and one is free to make their choices. In fact, warrants are worthless once they expire.
There are generally 2 types of stock warrants: o Call warrant which guarantees the right to purchase a set number of shares at a given price …show more content…
The warrants are currently getting traded at $4 each.
Current Stock Price = $25 per share
Current Warrant price = $2 per warrant
Warrant exercise price = $35 per share
A stock warrant will be profitable if the stock price exceeds the cost of warrant plus exercise price at expiration. Thus, in this case a warrant will be a profitable investment if shares are traded at $37 or more ($2 + $35)
Hence, if ABC stock is getting traded at $45 per share in 10 years, the warrants would be worth $10 each making the return on warrant = 400% (each warrant is $2 and return = 8/2*100 = 400)
However, is the stock is less than $25 in 10 years the warrants will have to expire worthless since it will not generate any gain after exercising.
The below table will highlight the profits and losses by buying the stock and warrants at various stock prices in the future:
Stock Price at Warrant Expiration Return on the Stock Return on the Warrant
$25 0% (100%)
$30 25% (100%)
$35 50% (100%)
$37 60% 0% (Break …show more content…
Let us analyse some of the differences:
Basis for Comparison Stock Options Stock Warrants
Issuer Options are offered by the stock exchange Warrants are normally only issued by the company whose stock is subject to the warrant.
Maturity Period Options generally expire within a year Issued for a lengthy time period as many as 15 years.
Standardisation of Contracts Options contract are standardised contracts and thus have to comply with rules specified by the exchange such as duration, size exercise pricing and trading units. Warrants are more flexible and can accordingly be customised to attract more investors.
Profits There is no benefit to the firm and company does not get any direct benefits but it directly goes to the winning investor. Warrants are issued to encourage sale of shares and to hedge against a reduction in the value of a company which can result in the drop of share prices. This in turn benefits the company.
Taxation Stock options are compensatory in nature and subject to rules governing compensation. Since warrants are not compensatory, they are applicable for taxation.
There are certain benefits which stock warrant offer over
INTRODUCTION
A stock warrant gives the right but not the obligation to purchase the stock of a company at a specific price and date. Some of the characteristics are:
Whenever such a warrant is exercised, the shares that fulfil the obligation are not received from another investor but directly from the company.
Firms generally issue stock warrants for raising money through equity and is usually offered at a lower price in comparison to stock options.
There is no lock-in period for buying a warrant and one is free to make their choices. In fact, warrants are worthless once they expire.
There are generally 2 types of stock warrants: o Call warrant which guarantees the right to purchase a set number of shares at a given price …show more content…
The warrants are currently getting traded at $4 each.
Current Stock Price = $25 per share
Current Warrant price = $2 per warrant
Warrant exercise price = $35 per share
A stock warrant will be profitable if the stock price exceeds the cost of warrant plus exercise price at expiration. Thus, in this case a warrant will be a profitable investment if shares are traded at $37 or more ($2 + $35)
Hence, if ABC stock is getting traded at $45 per share in 10 years, the warrants would be worth $10 each making the return on warrant = 400% (each warrant is $2 and return = 8/2*100 = 400)
However, is the stock is less than $25 in 10 years the warrants will have to expire worthless since it will not generate any gain after exercising.
The below table will highlight the profits and losses by buying the stock and warrants at various stock prices in the future:
Stock Price at Warrant Expiration Return on the Stock Return on the Warrant
$25 0% (100%)
$30 25% (100%)
$35 50% (100%)
$37 60% 0% (Break …show more content…
Let us analyse some of the differences:
Basis for Comparison Stock Options Stock Warrants
Issuer Options are offered by the stock exchange Warrants are normally only issued by the company whose stock is subject to the warrant.
Maturity Period Options generally expire within a year Issued for a lengthy time period as many as 15 years.
Standardisation of Contracts Options contract are standardised contracts and thus have to comply with rules specified by the exchange such as duration, size exercise pricing and trading units. Warrants are more flexible and can accordingly be customised to attract more investors.
Profits There is no benefit to the firm and company does not get any direct benefits but it directly goes to the winning investor. Warrants are issued to encourage sale of shares and to hedge against a reduction in the value of a company which can result in the drop of share prices. This in turn benefits the company.
Taxation Stock options are compensatory in nature and subject to rules governing compensation. Since warrants are not compensatory, they are applicable for taxation.
There are certain benefits which stock warrant offer over