What is a warrant? Do warrants affet a firm's financial ratios such as ROE?
A warrant is a security similar to a call option on a stock, except a warrant usually has a longer life than a call. Warrants may often be attached to issues of preferred stock or bonds in order to make the issue more attractive to investors, because warrants offer the opportunity for some participation in stock appreciation. When the warrant is exercised, the owner pays the stated strike price in exchange for new shares of common stock. All other things equal, whenever a company's number of common shares outstanding increases, measures such as ROE and EPS shoudl decrease, becuase the shareholders' ownership is diluted.