When would you expect the warrants to be exercised? Assume they have a 10-year life; that is,

Question:

When would you expect the warrants to be exercised? Assume they have a 10-year life; that is, they expire 10 years after issue.

MINI CASE

Paul Duncan, financial manager of Edusoft Inc., is facing a dilemma. The firm was founded five years ago to provide educational software for the rapidly expanding primary and secondary school markets. Although Edusoft has done well, the firm’s founder believes that an industry shakeout is imminent. To survive, Edusoft must grab market share now, and this will require a large infusion of new capital. Because he expects earnings to continue rising sharply and looks for the stock price to follow suit, Mr. Duncan does not think it would be wise to issue new at this time. On the other hand, interest rates are currently high by historical standards, and with the firm’s B rating, the interest payments on a new debt issue would be prohibitive. Thus, he has narrowed his choice of financing alternatives to two securities: (1) with warrants or (2) convertible As Duncan’s assistant, you have been asked to help in the decision process by answering the following questions:

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