lecture5-warrants - Warrants Convertibles and other...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
Warrants, Convertibles and other instruments 3 October 2005
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Corporate Finance 2 Definitions Warrants are call options issued by the firm They are equal to call options in all respects but: » They increase the number of existing shares » Hence dilute the existing equity To value them usual option pricing
Background image of page 2
Corporate Finance 3 Notation W t = value of 1 warrant X = exercise price n = No. shares before warrant exercise NW = No. warrants = q n q = NW / n = Dilution factor S t , σ t = share price, volatility with warrants P t , σ t = same, without warrants Total value is V t = n x S t + NW x W t = n x P t
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Corporate Finance 4 Pricing a warrant If the warrant is exercised, the stock price is: The value of the warrant at maturity, if exercised, is: q qX P n NW X NW V S t t t + + = + × + = 1 q X P X q qX P X S t t t + - = - + + = - 1 1
Background image of page 4
Corporate Finance 5 Warrants and Calls Thus, the value at maturity is: Therefore, a warrant can be priced as a call option multiplied by a constant: The call option is on a firm without the warrants! ) , 0 ( 1 1 ) 1 , 0 ( ) 0 , ( X P Max q q X P Max X S Max t t t - + = + - = - ) , , , , ( 1 1 ' 0 0 0 r T X P C q W σ + =
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Corporate Finance 6 Alternative method: example Company issues a € 2m package of debt and warrants The debt part is worth € 1.5m No. shares outstanding, n 1 m Current stock price, P 0 € 12 Warrants issued per share, q 0.10 Total warrants, NW 100,000 Exercise price, X € 10 Maturity 4 years Volatility, σ t ’ (before the issue) 0.38 Interest rate, r 10%
Background image of page 6
Corporate Finance 7 Example, cont The warrants are thus worth € 2m - € 1.5 = € 0.5 m Per warrant, 0.5 m / 100,000 = € 5 Q: is this a fair price?
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Corporate Finance 8 Example, cont Balance sheet before and after the issue: Assets 16 Total 16 Loans 4 Equity 12 Total 16 1 m shares x 12 per share Before
Background image of page 8
Corporate Finance 9 Example, cont Balance sheet after the issue: Assets 16 New assets 2 Total 18 Loans 4 New loan 1.5 Total debt 5.5 Warrants 0.5 Common Equity 12 Total equity 12.5 Total 18
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Corporate Finance 10 Example, cont Equity value without the warrants is: Total assets – debt = 18 – 5.5 = € 12.5m?
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/22/2010 for the course FINANCE 100104 taught by Professor Pfofessorking during the Spring '10 term at Erusmus University Rotterdam .

Page1 / 31

lecture5-warrants - Warrants Convertibles and other...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online