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Slides by Matthew Will

Principles of Corporate Finance Brealey and Myers Sixth Edition. Warrants and Convertibles. Slides by Matthew Will. Chapter 22. Irwin/McGraw Hill. The McGraw-Hill Companies, Inc., 2000. Topics Covered. What is a Warrant? What is a Convertible Bond?

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Slides by Matthew Will

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  1. Principles of Corporate Finance Brealey and Myers Sixth Edition • Warrants and Convertibles Slides by Matthew Will Chapter 22 Irwin/McGraw Hill • The McGraw-Hill Companies, Inc., 2000

  2. Topics Covered • What is a Warrant? • What is a Convertible Bond? • The Difference Between Warrants and Convertibles • Why do Companies Issue Warrants and Convertibles?

  3. Warrant Value Example: BJ Services warrants, January 1999 Exercise price $ 15 Warrant price $ 9 Share price $ 16 Warrant price at maturity BJ Services share price 15

  4. Warrant Value vs. Stock Price Value of warrant Actual warrant value prior to expiration Theoretical value (warrant lower limit) Stock price Exercise price = $15

  5. United Glue Warrants • United glue has just issued $2 million package of debt and warrants. Using the following data, calculate the warrant value. • # shares outstanding = 1 mil • Current stock price = $12 • Number of shares issued per share outstanding = .10 • Total number of warrants issued = 100,000 • Exercise price of warrants = $10 • Time to expiration of warrants = 4 years • Annualized standard deviation of stock daily returns = .40 • Rate of return = 10 percent

  6. United Glue Warrants • United glue has just issued $2 million package of debt and warrants. Using the following data, calculate the warrant value.

  7. United Glue Warrants • United glue has just issued $2 million package of debt and warrants. Using the following data, calculate the warrant value. (d1) = 1.104 (d2) = .304 N(d2) = .620 N(d1) = .865

  8. United Glue Warrants • United glue has just issued $2 million package of debt and warrants. Using the following data, calculate the warrant value. Warrant= 12[.865] - [.620]{10/1.14] = $6.15

  9. United Glue Warrants • United glue has just issued $2 million package of debt and warrants. Using the following data, calculate the warrant value. • Value of warrant with dilution

  10. United Glue Warrants • United glue has just issued $2 million package of debt and warrants. Using the following data, calculate the warrant value. • Value of warrant with dilution

  11. United Glue Warrants • United glue has just issued $2 million package of debt and warrants. Using the following data, calculate the warrant value. • Value of warrant with dilution

  12. What is a Convertible Bond? • ALZA • 5% Convertible 2006 • Convertible into 26.2 shares • Conversion ratio 26.2 • Conversion price = 1000/26.2 = $38.17 • Market price of shares = $28

  13. What is a Convertible Bond? • ALZA • 5% Convertible 2006 • Convertible into 26.2 shares • Conversion ratio 26.2 • Conversion price = 1000/26.2 = $38.17 • Market price of shares = $28 • Lower bound of value • Bond value • Conversion value = 26.2 x 28 = 733.60

  14. What is a Convertible Bond? • How bond value varies with firm value at maturity. Bond value ($ thousands) bond repaid in full default

  15. What is a Convertible Bond? • How conversion value at maturity varies with firm value. Conversion value ($ thousands)

  16. What is a Convertible Bond? • How value of convertible at maturity varies with firm value. Value of convertible ($ thousands) convert bond repaid in full default

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