公司理财教师手册、英文答案课件chap

1、Warrants and Convertibles Key Concepts and SkillsUnderstand how warrants and convertible bonds are similar to call optionsUnderstand how warrants and convertible bonds differ from call optionsUnderstand why corporations would issue either warrants or convertible bondsChapter Outline24.1 Warrants24.2

2、 The Difference between Warrants and Call Options24.3 Warrant Pricing and the Black-Scholes Model24.4 Convertible Bonds24.5 The Value of Convertible Bonds24.6 Reasons for Issuing Warrants and Convertibles24.7 Why are Warrants and Convertibles Issued?24.8 Conversion Policy24.1 WarrantsWarrants are ca

3、ll 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 tend to have longer maturity periods than exchange traded options.Warrants are generally issued with privately placed bonds as

4、 an “equity kicker.”Warrants are also combined with new issues of common stock and preferred stock and/or given to investment bankers as compensation for underwriting services. In this case, they are often referred to as a Green Shoe Option.WarrantsThe factors that affect call option value affect wa

5、rrant value in the same ways.Stock price+Exercise priceInterest rate +Volatility in the stock price+Expiration date+Dividends 24.2 The Difference between Warrants and Call OptionsWhen a warrant is exercised, a firm must issue new shares of stock.This can have the effect of diluting the claims of exi

6、sting shareholders.Dilution ExampleImagine that Mr. Armstrong and Mr. LeMond are shareholders in a firm whose only asset is 10 ounces of gold. When they incorporated, each man contributed 5 ounces of gold, then valued at $300 per ounce. They printed up two stock certificates and named the firm LegSt

7、rong, Inc.Suppose that Mr. Armstrong decides to sell Mr. Mercx a call option issued on Mr. Armstrongs share. The call gives Mr. Mercx the option to buy Mr. Armstongs share for $1,500.If this call finishes in-the-money, Mr. Mercx will exercise, Mr. Armstrong will tender his share.Nothing will change

8、for the firm except the names of the shareholders.Dilution ExampleSuppose that Mr. Armstrong and Mr. LeMond meet as the board of directors of LegStrong. The board decides to sell Mr. Mercx a warrant. The warrant gives Mr. Mercx the option to buy one share for $1,500.Suppose the warrant finishes in-t

9、he-money, (gold increased to $350 per ounce). Mr. Mercx will exercise. The firm will print up one new share.Dilution ExampleThe balance sheet of LegStrong Inc. would change in the following way:Balance Sheet Before(Book Value)0$3,000$3,000Total $3,000Total Assets $3,000Debt Equity (2 shares)Gold:Lia

10、bilities and EquityAssetsDilution ExampleNote that Mr. Armstrongs claim falls in value from $1,750 = $3,500 2 to $1,666.67 = $5,000 3Balance Sheet Before(Market Value)0$5,000$3,500$1,500Total $3,000Total Assets $5,000Debt Equity (3 shares)Gold:Cash:Liabilities and EquityAssets24.3 Warrant Pricing an

11、d the Black-Scholes ModelWarrants are worth a bit less than calls due to the dilution.To value a warrant, value an otherwise-identical call and multiply the call price by:Where n = the original number of sharesnw = the number of warrantsWarrant Pricing and the Black-Scholes ModelTo see why, compare

12、the gains from exercising a call with the gains from exercising a warrant.The gain from exercising a call can be written as:Note that when n = the number of shares, share price is:Thus, the gain from exercising a call can be written as:Warrant Pricing and the Black-Scholes ModelNote that when # = th

13、e original number of shares and #w = the number of warrants,The gain from exercising a warrant =Thus, the gain from exercising a warrant can be written as:Warrant Pricing and the Black-Scholes ModelThe gain from exercising a warrant can be written as:The gain from exercising a call can be written as

14、:A bit of algebra shows that these equations differ by a factor ofSo to value a warrant, multiply the value of an otherwise-identical call by 24.4 Convertible BondsA convertible bond is similar to a bond with warrants.The most important difference is that a bond with warrants can be separated into d

15、ifferent securities and a convertible bond cannot.Recall that the minimum (floor) value of convertible:Straight or “intrinsic” bond valueConversion valueThe conversion option has value.24.5 The Value of Convertible BondsThe value of a convertible bond has three components:Straight bond valueConversi

16、on valueOption valueConvertible Bond ExampleLitespeed, Inc., just issued a zero coupon convertible bond due in 10 years.The conversion ratio is 25 shares.The appropriate interest rate is 10%.The current stock price is $12 per share.Each convertible is trading at $400 in the market.What is the straig

17、ht bond value?What is the conversion value?What is the option value of the bond?Convertible Bond ExampleWhat is the straight bond value?What is the conversion value?25 shares $12/share = $300What is the option value of the bond? $400 385.54 = $14.46The Value of Convertible BondsConvertible Bond Valu

18、eStock Price Straight bond valueConversion Value= conversion ratiofloor valuefloor valueConvertible bond valuesOption value24.6 Reasons for Issuing Warrants and ConvertiblesA reasonable place to start is to compare a hybrid like convertible debt to both straight debt and straight equity.Convertible

19、debt carries a lower coupon rate than does otherwise-identical straight debt.Since convertible debt is originally issued with an out-of-the-money call option, one can argue that convertible debt allows the firm to sell equity at a higher price than is available at the time of issuance. However, the

20、same argument can be used to say that it forces the firm to sell equity at a lower price than is available at the time of exercise.Convertible Debt vs. Straight DebtConvertible debt carries a lower coupon rate than does otherwise-identical straight debt.If the company subsequently does poorly, it wi

21、ll turn out that the conversion option finishes out-of-the-money.But if the stock price does well, the firm would have been better off issuing straight debt.In an efficient financial market, convertible bonds will be neither cheaper or more expensive than other financial instruments.At the time of i

22、ssuance, investors pay the firm for the fair value of the conversion option.Convertible Debt vs. Straight EquityIf the company subsequently does poorly, it will turn out that the conversion option finishes out-of-the-money, but the firm would have been even better off selling equity when the price w

23、as high.But if the stock price does well, the firm is better off issuing convertible debt rather than equity.In an efficient financial market, convertible bonds will be neither cheaper or more expensive than other financial instruments.At the time of issuance, investors pay the firm for the fair val

24、ue of the conversion option.24.7 Why Are Warrants and Convertibles Issued?Convertible bonds reduce agency costs by aligning the incentives of stockholders and bondholders.Convertible bonds also allow young firms to delay expensive interest costs until they can afford them.Support for these assertions is found in the fact that firms that issue convertible bonds are different from other firms:The bond ratings of firms using convertibles are lower.Convertibles tend to be used by smaller firms with high growth rates and more financial leverage.Convertibles are usually subordinated a