Chapter 20, Problem 2MC

Summary Introduction

Case Summary:

 Company E is developing educational software for the primary and secondary school markets. In order to maintain the market place the owner entrusted the financial manager with the task to increase the market share which raises the capital requirements.

Person P after observing the market trends analyze that the stock price of the company may rise in future thus, cannot raise the new capital and also due to the high interest rates and B rating of the firm it cannot issue the debt instruments. The Person P came up with three alternatives, preferred stock, bonds with warrants and convertible bonds and required to make choice out of these three financial alternatives.

To determine: The knowledge of call option helps understands the warrants and convertibles.