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Paul Duncan, financial manager of EduSoft Inc., is facing a dilemma. The firm was founded...

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Finance

Paul Duncan, financial manager of EduSoft Inc., is facing a dilemma. The firm was founded 5 years ago to provide educational software for the rapidly expanding primary and secondary school markets. Although EduSoft has done well, the firms founder believes 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 common stock at this time. On the other hand, interest rates are currently high by historical standards, and the firms B rating means that interest payments on a new debt issue would be prohibitive. Thus, he has narrowed his choice of financing alternatives to: (1) preferred stock, (2) bonds with warrants, or (3) convertible bonds.

As Duncans assistant, you have been asked to help in the decision process by answering the following questions.

  1. How can knowledge of call options help a financial manager to better understand warrants and convertibles?

Please give an original answer, don't copy. Minimum 150 words.

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