This article develops a criterion for comparing warrant financing with further common stock financing from the viewpoint of a firm's current stockholders. This criterion is then related to a complementary one presented by Bierman [1] and a condition is imposed on Bierman's cost of warrant financing for warrant financing to be preferred to further stock financing. Finally the article considers the limitations of these criteria and qualitatively discusses risk considerations that influence the attractiveness of warrant financing.

In the linear market-index model of the return-generating process, return on security j is given bywhere αj and βj are constants characteristic of company j, is return on a market index, and is the company-specific component of return such that and . The coefficient βj is given by . It is known as market responsiveness, volatility, systematic risk, and, more commonly, simply as “beta.” It has been widely accepted as a measure of nondiversifiable risk and incorporated in popular performance measures. Many stock information services now provide estimates of beta.

Almost two decades ago, Markowitz [12] formulated the portfolio selection problem as a parametric quadratic programming problem. The crux of his formulation was the mean-variance assumption which asserted that a portfolio is efficient if (and only if): (1) it has less variance than any other feasible portfolio with the same return and (2) it has more return than any other feasible portfolio with the same variance.

This paper has presented a model for solving a central problem of short-term financial management — cash planning and credit-line determination. The core of the model is an algorithmic procedure for finding the best cash plan and the associated credit line for a given operating plan and long-term financial plan. Since the model requires a computation of cash balances, it must be embedded in a financial statement simulator.The two keys to the model are:1. the use of priority rankings in specifying the order in which assets and liabilities are used to change cash balances;2. the separation of solution constraints into two classes—consistency conditions given by C1, C2, and C3 and feasibility conditions stated in C4, C5, and C6. The latter conditions require changes in the long-term plan (or the operating plan) to obtain feasibility of the short-term plan.The use of priority rankings and the separation of solution constraints into these two classes makes possible the formulation of an algorithmic procedure that is computationally efficient and that avoids having to solve a mathematical programming problem.The benefits of the model are: (1) saved time; (2) increased accuracy in cash planning; (3) quick determination of infeasibility with respect to the short-term plan. For a firm already using financial statement simulation, the model is sufficiently easy to program and implement so that saved user time and system expense alone easily justify the cost of developing the system. Finally, a system that automatically handles short-term cash planning is critical for other areas of short-term planning, for meaningful sensitivity analysis, and for long-term financial planning for firms (such as General Recreation) for which a substantial part of the total financing is provided by either credit-line borrowing or commercial paper issuance.Because of the similarity of both banking and financial practice across firms and banks, the basic approach used in this model is applicable to most nonfinancial corporations.

The interdependence of loan cost and tangible bank activity is an aspect of the cost of bank debt that has not been treated in the literature. Understanding this interdependence is important for banks in pricing their services, especially as banks adopt more flexible pricing policies. This understanding is crucial for a firm in establishing the true cost of bank borrowing, in comparing bank borrowing with other sources of funds, and in evaluating the firm's banks. It is also important for understanding the firm-bank relationship in general and the cost of capital in particular.

Bernell K. Stone, Bankruptcy Costs: Some Evidence: Discussion, The Journal of Finance, Vol. 32, No. 2, Papers and Proceedings of the Thirty-Fifth Annual Meeting of the American Finance Association, Atlantic City, New Jersey, September 16-18, 1976 (May, 1977), pp. 366-368