The sole purpose why a corporation sells shares and bonds is to source additional revenue to assist in expanding company`s operations. However, there are other objectives of issuance of shares such as retention and motivation of employees, and appreciation of existing stockholders. In order to sell high number of shares and make them attractive, corporations issue share warrants. These warrants guarantee potential buyers of a constant exercise price during the period of sale. The warrant also provides the existing stockholders of the corporation with the right to purchase stocks during the fixed exercise period. The stockholders enjoy the obligation for a much longer period compared to any other option. Nonetheless, warrants can be issued at three different levels, namely on:
• Pro rata basis
• Incentive stock-option plan
• Existing purchasers of bonds
Pro rata basis to existing stockholders
Under this category, stockholders are issued warrants based on the proportion of shares they maintain with the corporation. The issuance of the warrants is supposed to be in proportion with the numbers of shares held. The existing stockholders will exercise their obligations when the stock price exceeds the exercise price. This is because under normal circumstances the exercise price is higher than the market stock price. The significance of issuing the warrants on a pro rata basis is to encourage existing and potential stockholders to hold more shares. Corporations charge a high exercise price and provide a long expiry date in order to solicit enough funds that will help the corporation to recover from bankruptcy. Some corporations may issue it in terms of dividends. As a result, stockholders with warrants do not earn dividends, and they find it beneficial when they detach and sell the stock warrants almost immediately.
Incentive stock-option plan
In most cases, stock warrants are issued as an incentive to employees of the corporation. This is meant to attract and retain competent and experienced employees. In addition, it will ensure that the employees own part of the company and as such, it will improve their level of performance. The employees are rewarded for their work well done and loyalty they have accorded the corporations. Furthermore, a strong workforce is the lifeblood of any organization. As such, the incentive seeks to establish a mutual relationship between the corporation and employees. Furthermore, it will match employees' interests with the objectives of the corporation. However, in this category, the exercise price is higher than the current market price and also the length of the obligation is at least five years.
Purchasers of the company's bonds
The other category of warrant issuance is individuals who purchase company`s bonds. In this case, detachable warrants are attached to the corporation`s bond in order to make them attractive and yield the intended funds. The bondholder is given the obligation to purchase corporation stocks at a fixed price for a time of at least five years. The detachability of the warrants provides the bondholder with option of selling one and maintaining the other; hence provides an independent opportunity to trade and invest in stock warrants. Bondholders are guaranteed a higher return of their investment with minimal risks attached. The significance of a high exercise price compared to the market price, and long exercise time is to render the warrants beneficial to the corporation and potential investors. Traded warrants will generate revenue for the corporation necessary for countering the effects of bankruptcy or for expanding the operations of the organization. It will cushion the corporation from any short-term losses and protect the interests of the buyers