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Learning Objectives

Learning Objectives. Calculate the conversion value of a convertible security. (LO 5 ) Describe warrants and compare them to convertible securities. (LO 6 ) Calculate the intrinsic value and the speculative premium on a warrant. (LO 7 )

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Learning Objectives

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  1. Learning Objectives • Calculate the conversion value of a convertible security. (LO5) • Describe warrants and compare them to convertible securities. (LO6) • Calculate the intrinsic value and the speculative premium on a warrant. (LO7) • Show how convertible securities and warrants affect earnings per share as reported on the income statement. (LO8)

  2. LO6 Warrants Warrant: • an option to buy a stated number of shares of common stock at a specified price over a given time period (a long-term option to buy stock) • may be attached to another security issue. Investor can usually detach and sell warrants separately • may be issued “stand-alone” • is highly speculative for the investor, as its value is dependent on the market movement of the stock • has a large potential for appreciation if the price of the stock goes up

  3. LO6 Table 19-2Relationships determining warrant prices, October 2011 Source: www.Canadianwarrants.com

  4. LO6 Review of Formulas (b) 3. Intrinsic value of a warrant I = (M - E) x N (19-3) where I = Intrinsic value of a warrant M = Market value of a common stock E = Exercise price of a warrant N = Number of shares each warrant entitles the holder to purchase 4. Speculative premium of a warrant S = W - I (19-4) where S = Speculative premium W = Warrant price I = Intrinsic value

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