Question

. How would a firm’s decision to pay out a higher percentage of its earnings as dividends affect each of the following? 1. The value of its long-term warrants 2. The likelihood that its convertible bonds will be converted 3. The likelihood that its warrants will be exercised b. If you owned the warrants or convertibles of a company, would you be pleased or displeased if it raised its payout rate from 20% to 80%? Why?

Answer 1

1. The long term warrants will diminish in value because due to the dividend payout the share price will be lower

2. The likelihood of its convertible bonds to be converted will also reduce because of the same reason. At the date of conversion, a bond owner will compare the share price or the bond value and if the share price is higher he will convert it into shares from bonds.

3. Again due to the same reason as explained above, the likelihood of the warrants being exercised will also be low.Yes, i would be displeased if the company increases its payout from 20% to 80% because the benefit i would have received in future will be less. The share price would be higher due to lower dividend payouts and would benefit when the bonds are converted or warrants are exercised.