ActSc371_Lecture 29_Chapter 25 (Ross)

ActSc371_Lecture 29_Chapter 25 (Ross) - Lecture 29 Chapter...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Lecture 29 Chapter 25 Warrants and Convertibles (Corporate Finance by Ross et al.) ActSc 371 Corporate Finance 1 Instructor: Dr. Lysa Porth 1 25.1 Warrants Warrants are call options that give the holder the right, but not the obligation, to buy shares of common stock directly from a company at a fixed price for a given period of time. Warrants are generally issued with privately placed bonds as an equity kicker (sweetener). Warrants are also combined with new issues of common stock and preferred stock, given to investment bankers as compensation for underwriting services. In this case, they are often referred to as a Green Shoe Option (i.e. right to sell investor more shares than originally planned). Warrants are also given to investment bankers as compensation for underwriting services or used to compensate creditors in the case of bankruptcy. 25.1 Warrants Warrant holders are not entitled to vote or to receive dividends. The warrant holder loses every time a cash dividend is paid because the dividend reduces stock price and thus reduces the value of the warrant. the exercise of warrants increases the number of shares, which means that the firms assets and profits are spread over a large number of shares. Dilution. Firms with significant amounts of warrants or convertibles outstanding are required to report earnings on a fully diluted basis, which recognizes the potential increase in the number of shares. Warrants tend to have longer maturity periods than exchange traded options. 25.1 Warrants The same factors that affect call option value affect warrant value in the same ways. 1. Stock price + 2. Exercise price 3. Interest rate + 4. Volatility in the stock price + 5. Expiration date + 6. Dividends 25.2 The Difference Between Warrants and Call Options Even though stock options and stock warrants behave in almost the same fashion and can be traded in the same fashion, they are actually fundamentally different instruments. Stock options are contracts between a person or institution owning a stock or willing to buy a stock and another person who either wants to buy or sell those stocks at a specific price. Stock Warrants on the other hand are contracts between investors and the bank or financial institutions issuing those warrants on behalf of the company whose stocks the warrants are based on. When you buy warrants, it is these financial institutions selling it to you and when you sell warrants, it is these same financial institutions buying from you - not another investor. 25.2 The Difference Between Warrants and Call Options The most important difference between call options and warrants is that call options are issued by individuals and warrants are issued by firms....
View Full Document

Page1 / 24

ActSc371_Lecture 29_Chapter 25 (Ross) - Lecture 29 Chapter...

This preview shows document pages 1 - 7. Sign up to view the full document.

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