财务管理基础工业出版社13版Chap019-PPT

Convertibles Warrants andDerivatives 19 1 2 ChapterOutline ConvertingconvertiblesecuritiestocommonstockConvertiblesecuritiesmaymovewiththevalueofcommonstockInterestratesonconvertiblesecuritiesWarrantsAccountantrequirementsofconvertiblesandwarrantsDerivativesecurities 1 3 ConvertibleSecurities Abondorshareofpreferredstockthatcanbeconverted attheoptionoftheholder intocommonstockWhenaconvertibledebentureisinitiallyissued aconversionratiotocommonstockisspecifiedRatioindicatesthenumberofcommonstocksharesofconverteddebenturesTogettheconversionprice theparvalueofthebondisdividedbytheconversionratio 1 4 ValueoftheConvertibleBond MustevaluatetheconversionprivilegesOthervaluestobeconsideredinclude ConversionvalueConversionpremiumPurebondvalueDownsiderisksFloorvalue 1 5 PriceMovementPatternforaConvertibleBond 1 6 PricingPatternforConvertibleBondsOutstanding January2008prices 1 7 IsthisFool sGold Drawbacks Onceconvertibledebenturesbegintoincreaseinvalue thedownsideprotectionbecomesredundantIfinterestratesinthemarketrise thefloorvalue orthepurebondvalue couldfall creatingmoredownsideriskPurchaseroftheconvertiblebondnormallyalsopaysapremiumovertheconversionvalueThepurchaserisalwaysaskedtoacceptbelow marketratesofinterestonthedebtinstrumentConvertiblesmayalsosufferfromtheattachmentofacallprovision 1 8 AdvantagestotheCorporation InterestratepaidonconvertibleissuesislowerMaybetheonlywayasmallcorporationmayenterthebondmarketAttractivetoacorporationthatbelievesitsstockiscurrentlyundervaluedThepriceofastockmaygoupiftheissuanceofcommonstockorconvertiblesisdelayedbyanappropriatetime 1 9 DisadvantagestotheCorporation SizeofconvertiblebondmarketissmallcomparedtomarketsfornonconvertiblecorporatebondsandcommonstocksFirmssellingconvertiblesecuritiesaregenerallysmallerfirmsgrowingfaster havingsmalldividendpayoutratioswhichresultsinsmalldividendyieldsWhileafewfirmsthatsellconvertiblebondsmaybehighqualityfirms mostaresmallcompanieswithlowcreditratingsandhighrisk 1 10 ForcingConversion CalloptionprovisionisusedtoforceconversionwhenitneedstoshiftoutstandingdebttocommonstockValueofconvertiblebondsmightgoupsignificantlyImprovescompositionofcompany sbalancesheetbydecreasingdebt to equityanddebt to assetratio 1 11 SuccessfulConvertibleBondsandPreferredStockNotYetCalled 1 12 MethodofForcingConversion Iftheconversionvalueisabovethecallpricewhenthebondiscalled AdiscerninginvestorwouldtakethesharesofcommonstockratherthanacashpayoutForcingconversionincreasescashflowWhencomparingthecurrentyieldtothedividendyieldonthecommonstock Investorsgenerallydonotwanttoconvertunlessthedividendyieldishigherthantheyieldonthebond 1 13 Step UpintheConversionPrice Whenthebondisissued thecontractmayspecifytheconversionprovisionsAttheendofeachtimeperiod thereisastronginducementtoconvertratherthanacceptanadjustmenttoahigherconversionpriceandalowerconversionratio 1 14 AccountingConsiderationswithConvertibles Thefullimpactofconversionprivilegesapplyingtoconvertiblesecuritiesandotherdilutivesecurities Maygenerateadditionalcommonstockinthefuture itspotentialeffectsmustbeconsideredDifferentmeasurestoearningspershare BasicearningspershareDilutedearningspershare 1 15 DilutedEarningsPerShare Assume400 000newshareswillbecreatedfrompotentialconversion whileatthesametimeallowingforreductionininterestpaymentsthatwouldoccurasaresultofconversionofthedebttocommonstockThebefore taxinterestpaymentsare 450 000 theaftertaxinterestcostof 270 000 450 000 1 40 270 000 willbesavedandcanbeaddedbacktotheincomeDilutedearnings Adjustedearningsaftertaxes pershareSharesoutstanding AllconvertiblesecuritiesReportedInterestearningssavings 1 500 000 270 000 1 770 000 1 261 000 000 400 0001 400 000 1 16 XYZCorporation 1 17 FinancingthroughWarrants AnoptiontobuyastatednumberofsharesofcommonstockataspecifiedpriceoveragiventimeperiodSometimesissuedasafinancialsweetenerinabondofferingMayenablethefirmtoissuedebtwhenitmightnothavebeenpossibledueto LowqualitycreditratingHighinterestrateenvironment 1 18 Warrants Features UsuallydetachablefromthebondissueHavetheirownmarketpriceAretradedontheNYSEorover the counterInitialdebttowhichtheywereattachedremainsinplaceasastand alonebondHighlyspeculative DoesnothaveasecurityvalueIsdependentonmarketmovement 1 19 RelationshipsDeterminingWarrantPrices 1 20 ValuationofWarrants Intrinsicvalueofawarrant I M E XNWhereI IntrinsicvalueofawarrantM Marketvalueofacommonstock stockprice E ExercisepriceofawarrantN NumberofshareseachwarrantentitlestheholdertopurchaseSpeculativepremium S W IWhereS SpeculativepremiumW WarrantpriceI Intrinsicvalue 1 21 ExpectationofPotentialProfit BondinvestorsarewillingtoacceptlowerinterestrateswhenwarrantsareattachedWarrantshaveapotentialvalueinexcessofthehigherinterestrateonbondsDecliningpremiummaybeduetothespeculatorlosingabilitytouseleveragetogeneratehighreturnsasthepriceofstockgoesupThespeculatormayalsopayaverylowpremiumathigherstockpricesbecausethenthereislessdownsideprotection 1 22 MarketPriceRelationshipsforaWarrant 1 23 UseofWarrantsinCorporateFinance AstraightdebtissuemaynotbeacceptableMaybeacceptedonlyatextremelyhighratesThesamesecuritymaybewellreceivedifdetachablewarrantsareincludedMaybeincludedasanadd oninamergeroracquisitionagreementMaybeissuedinacorporatereorganizationorbankruptcytooffertheshareholdersachancetorecoverifrestructuringissuccessful 1 24 UseofWarrantsinCorporateFinance cont d MaynotbeasdesirableasconvertiblesecuritiesforcreatingnewcommonstockFirmswithwarrantshavenooptionofforcingconversionofdebtintocommonstockTheonlypossibleincentiveisastep upinexercisepriceWhereaprogressivelyhigheroptionpriceispaidifwarrantsarenotexercisedbyagivendate 1 25 AccountingConsiderationwithWarrants AllwarrantsareincludedincomputingdilutedearningspershareNumberofnewsharescreatedbytheexerciseofwarrantsmustbecomputed 1 26 DerivativeSecurities ValuesderivedfromanunderlyingsecurityInthecaseofequityoptions thevalueisderivedbytheunderlyingcommonstockFuturescontractsongovernmentbondsandTreasurybillsderivetheirvaluefrom Thosegovernmentsecurities andfuturescontractsonoilorwheathavethosecommoditiesasdeterminantsoftheirbasicvalues 1 27 Options OptionsAright butnottheobligation tobuyorsellanunderlyingsecurityatasetpriceforagiventimeperiod e g employeestockoptionCallOptionSimilartoemployeestockoptionbutusuallytradedbetweenindividualinvestorsPutOptionAnoptiontosellsecuritiestotheoptio