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1、ExecutiveSummary Thischapterdescribesthebasicfeaturesofwarrantsandconvertibles Theimportantquestionsare Howcanwarrantsandconvertiblesbevalued Whatimpactdowarrantsandconvertibleshaveonfirmvalue Whatarethedifferencesbetweenwarrants convertiblesandcalloptions Underwhatcircumstancesarewarrantsandconvert
2、iblesconvertedintocommonstock ChapterOutline 24 1Warrants24 2TheDifferencebetweenWarrantsandCallOptions24 3WarrantPricingandtheBlack ScholesModel Advanced 24 4ConvertibleBonds24 5TheValueofConvertibleBonds24 6ReasonsforIssuingWarrantsandConvertibles24 7WhyareWarrantsandConvertiblesIssued24 8Conversi
3、onPolicy24 9SummaryandConclusions 24 1Warrants Warrantsarecalloptionsthatgivetheholdertheright butnottheobligation tobuysharesofcommonstockdirectlyfromacompanyatafixedpriceforagivenperiodoftime Warrantstendtohavelongermaturityperiodsthanexchangetradedoptions Warrantsaregenerallyissuedwithprivatelypl
4、acedbondsasan equitykicker Warrantsarealsocombinedwithnewissuesofcommonstockandpreferredstock giventoinvestmentbankersascompensationforunderwritingservices Inthiscase theyareoftenreferredtoasaGreenShoeOption 24 1Warrants Thesamefactorsthataffectcalloptionvalueaffectwarrantvalueinthesameways Stockpri
5、ce Exerciseprice Interestrate Volatilityinthestockprice Expirationdate Dividends 24 2TheDifferenceBetweenWarrantsandCallOptions Whenawarrantisexercised afirmmustissuenewsharesofstock Thiscanhavetheeffectofdilutingtheclaimsofexistingshareholders DilutionExample ImaginethatMr ArmstrongandMr LeMondares
6、hareholdersinafirmwhoseonlyassetis10ouncesofgold Whentheyincorporated eachmancontributed5ouncesofgold thenvaluedat 300perounce Theyprinteduptwostockcertificates andnamedthefirmLegStrong Inc SupposethatMr ArmstrongdecidestosellMr MercxacalloptionissuedonMr Armstrong sshare ThecallgivesMr Mercxtheopti
7、ontobuyMr Armstong ssharefor 1 500 Ifthiscallfinishesin the money Mr Mercxwillexercise Mr Armstrongwilltenderhisshare Nothingwillchangeforthefirmexceptthenamesoftheshareholders DilutionExample SupposethatMr ArmstrongandMr LeMondmeetastheboardofdirectorsofLegStrong TheboarddecidestosellMr Mercxawarra
8、nt ThewarrantgivesMr Mercxtheoptiontobuyonesharefor 1 500 Supposethewarrantfinishesin the money goldincreasedto 350perounce Mr Mercxwillexercise Thefirmwillprintuponenewshare DilutionExample ThebalancesheetofLegStrongInc wouldchangeinthefollowingway Dilution ThebalancesheetofLegStrongInc wouldchange
9、inthefollowingway Dilution ThebalancesheetofLegStrongInc wouldchangeinthefollowingway NotethatMr Armstrong sclaimfallsinvaluefrom 1 750 3 500 2to 1 666 67 5 000 3 WarrantPricingandtheBlack ScholesModel Advanced Warrantsareworthabitlessthancallsduetothedilution Tovalueawarrant valueanotherwise identi
10、calcallandmultiplythecallpriceby Wheren theoriginalnumberofsharesnw thenumberofwarrants WarrantPricingandtheBlack ScholesModel Advanced Toseewhy comparethegainsfromexercisingacallwiththegainsfromexercisingawarrant Thegainfromexercisingacallcanbewrittenas Notethatwhenn thenumberofshares sharepriceis
11、Thus thegainfromexercisingacallcanbewrittenas WarrantPricingandtheBlack ScholesModel Advanced Notethatwhenn theoriginalnumberofsharesandnw thenumberofwarrants Thegainfromexercisingawarrantcanbewrittenas Thus thegainfromexercisingawarrantcanbewrittenas WarrantPricingandtheBlack ScholesModel Advanced
12、Thegainfromexercisingawarrantcanbewrittenas Thegainfromexercisingacallcanbewrittenas Abitofalgebrashowsthattheseequationsdifferbyafactorof Sotovalueawarrant multiplythevalueofanotherwise identicalcallby 24 4ConvertibleBonds Aconvertiblebondissimilartoabondwithwarrants Themostimportantdifferenceistha
13、tabondwithwarrantscanbeseparatedintodifferentsecuritiesandaconvertiblebondcannot Recallthattheminimum floor valueofconvertible Straightor intrinsic bondvalueConversionvalueTheconversionoptionhasvalue 24 5TheValueofConvertibleBonds Thevalueofaconvertiblebondhasthreecomponents StraightbondvalueConvers
14、ionvalueOptionvalue ConvertibleBondProblem Litespeed Inc justissuedazerocouponconvertiblebondduein10years Theconversionratiois25shares Theappropriateinterestrateis10 Thecurrentstockpriceis 12pershare Eachconvertibleistradingat 400inthemarket Whatisthestraightbondvalue Whatistheconversionvalue Whatis
15、theoptionvalueofthebond ConvertibleBondProblem continued Whatisthestraightbondvalue Whatistheconversionvalue 25shares 12 share 300Whatistheoptionvalueofthebond 400 385 54 14 46 24 5TheValueofConvertibleBonds ConvertibleBondValue StockPrice ConversionValue 24 6ReasonsforIssuingWarrantsandConvertibles
16、 Areasonableplacetostartistocompareahybridlikeconvertibledebttobothstraightdebtandstraightequity Convertibledebtcarriesalowercouponratethandoesotherwise identicalstraightdebt Sinceconvertibledebtisoriginallyissuedwithanout of the moneycalloption onecanarguethatconvertibledebtallowsthefirmtosellequityatahigherpricethanisavailableatthetimeofissuance However thesameargumentcanbeusedtosaythatitforcesthefirmtosellequityatalowerpricethanisavailableatthetimeofexercise ConvertibleDebtvs StraightDebt Con
