24.Lect(1).pptx - Ch 24 Options u2026 In Securities u00a9...

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Employee Stock Options provide a bonus or incentive, for reduced salary + Align employee interests with shareholders - Can make them undiversified, and can encourage excessive risk-taking Equity is a call option on the assets of a firm with risky debt Shareholders ‘exercise’ their ownership by paying the debt’s promised face Bankruptcy ‘puts’ the value of the assets to the debtholders Warrants are call options written by the company Often long term; issued to reduce bond coupons or to existing shareholders Exercise increases the shares outstanding and the firm’s cash Convertible bonds and preferred stock: into shares at holder’s option Ex: 4% semiannual coupons maturing in 20 years, with $40 conversion price At today’s 5% yield, the straight bond value = 502.06 + 372.43 = $874.49 Conversion ratio = number of shares per converted bond = Face / $40 = 25 At today’s stock price = $38, the conversion value = 25 shares * $38 = $950 Convertible bond value is AT LEAST the larger Callable bonds: company’s option to repurchase bonds before maturity Ch 24. Options: … In Securities © Kelly D. Welch 24-1

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