财务管理基础课件：Convertibles,Warrants,and Derivatives

Convertibles,Warrants,andDerivatives

ChapterOutlineConvertiblesecuritiesConvertiblesecuritiesandthevalueofcommonstockInterestratesonconvertiblesecuritiesWarrantsAccountantrequirementsofconvertiblesandwarrantsDerivativesecuritiesConvertibleSecuritiesAbondorshareofpreferredstockthatcanbeconverted,attheoptionoftheholder,intocommonstockWhenaconvertibledebentureisinitiallyissued,aconversionratiotocommonstockisspecifiedConversionratioindicatesthenumberofsharesofcommonstockintowhichthedebenturesmaybeconvertedTogettheconversionprice,theparvalueofthebondisdividedbytheconversionratioValueoftheConvertibleBondMustevaluatetheconversionprivilegesOthervaluestobeconsideredinclude:ConversionvalueConversionpremiumPurebondvalueDownsiderisksFloorvaluePriceMovementPattern

foraConvertibleBondPricingPatternforConvertibleBondsOutstanding,December2009pricesDrawbacksofConvertibleSecuritiesOnceconvertibledebenturesbegintoincreaseinvalue,thedownsideprotectionbecomesredundantIfinterestratesinthemarketrise,thefloorvalue,orthepurebondvaluecouldfall,creatingmoredownsideriskPurchaseroftheconvertiblebondnormallyalsopaysapremiumovertheconversionvalueThepurchaserisalwaysaskedtoacceptbelow-marketratesofinterestonthedebtinstrumentConvertiblesmayalsosufferfromtheattachmentofacallprovisionAdvantagestotheCorporationInterestratepaidonconvertibleissuesislowerMaybetheonlywayasmallcorporationmayenterthebondmarketAttractivetoacorporationthatbelievesitsstockiscurrentlyundervaluedThepriceofastockmaygoupiftheissuanceofcommonstockorconvertiblesisdelayedbyanappropriatetimeDisadvantagestotheCorporationSizeofconvertiblebondmarketissmallcomparedtomarketsfornonconvertiblecorporatebondsandcommonstocksFirmssellingconvertiblesecuritiesaregenerallysmallerfirmsgrowingfaster,havingsmalldividendpayoutratioswhichresultsinsmalldividendyieldsWhileafewfirmsthatsellconvertiblebondsmaybehighqualityfirms,mostaresmallcompanieswithlowcreditratingsandhighriskForcingConversionCalloptionprovisionisusedtoforceconversionwhenitneedstoshiftoutstandingdebttocommonstockValueofconvertiblebondsmightgoupsignificantlyImprovescompositionofcompany’sbalancesheetbydecreasingdebt-to-equityanddebt-to-assetratioConversionalsohelpsthecompanyincreasecashflowbysubstitutinglowerornodividendsfortheinterestexpenseCharacteristicsofConvertibleBonds,December18,2009MethodofForcingConversionIftheconversionvalueisabovethecallpricewhenthebondiscalled:AdiscerninginvestorwouldtakethesharesofcommonstockratherthanacashpayoutForcingconversionincreasescashflowWhencomparingthecurrentyieldtothedividendyieldonthecommonstock:InvestorsgenerallydonotwanttoconvertunlessthedividendyieldishigherthantheyieldonthebondStep-UpintheConversionPriceWhenthebondisissued,thecontractmayspecifytheconversionprovisionsAttheendofeachtimeperiod,thereisastronginducementtoconvertratherthanacceptanadjustmenttoahigherconversionpriceandalowerconversionratioAccountingConsiderations

withConvertiblesThefullimpactofconversionprivilegesapplyingtoconvertiblesecurities,warrantsandotherdilutivesecurities:Maygenerateadditionalcommonstockinthefuture,itspotentialeffectsmustbeconsideredDifferentmeasurestoearningspershare:BasicearningspershareDilutedearningspershareXYZCorporation–BasicEPSDilutedEarningsPerShareAssume400,000newshareswillbecreatedfrompotentialconversion,whileatthesametimeallowingforreductionininterestpaymentsthatwouldoccurasaresultofconversionofthedebttocommonstockThebefore-taxinterestpaymentsare$450,000,theafter-taxinterestcostof$270,000assumingataxrateof40%[$450,000(1-.40)=$270,000]willbesavedandcanbeaddedbacktotheincome

Dilutedearnings=Adjustedearningsaftertaxes;pershareSharesoutstanding+AllconvertiblesecuritiesReportedInterestearningssavings=$1,500,000+$270,000=$1,770,000=$1.261,000,000+400,0001,400,000FinancingthroughWarrantsAnoptiontobuyastatednumberofsharesofcommonstockataspecifiedpriceoveragiventimeperiodSometimesissuedasafinancialsweetenerinabondofferingMayenablethefirmtoissuedebtwhenitmightnothavebeenpossibledueto:LowqualitycreditratingHighinterestrateenvironmentWarrants-FeaturesUsuallydetachablefromthebondissueHavetheirownmarketpriceAretradedontheNYSEorover-the-counterInitialdebttowhichtheywereattachedremainsinplaceasastand-alonebondHighlyspeculative:DoesnothaveasecurityvalueIsdependentonmarketmovementIfthecommonstockofthefirmisvolatile,thevalueofthewarrantsmaychangedramaticallyBondinvestorsarewillingtoacceptlowerinterestrateswhenwarrantsareattachedWarrantshaveapotentialvalueinexcessofthehigherinterestrateonbondsRelationshipsDetermining

WarrantPricesValuationofWarrantsIntrinsicvalueofawarrant:

I=(M–E)×N WhereI=Intrinsicvalueofawarrant M=Marketvalueofacommonstock(stockprice) E=Exercisepriceofawarrant N=NumberofshareseachwarrantentitlestheholdertopurchaseSpeculativepremium:

S=W–I Where S=Speculativepremium W=Warrantprice I=IntrinsicvalueMarketPriceRelationships

foraWarrantLeverageinValuingWarrantsNegativespeculativepremiumindicateswarrantisunderpricedIfthestockpriceisbelowtheexerciseprice,theintrinsicvalueofthewarrantwouldbenegativeorzeroThetypicalrelationshipbetweenthewarrantpriceandintrinsicvalueofawarrantis:ThespeculativepremiumdeclinesasthevalueofwarrantgetsclosertothestockpriceDecliningpremiummaybeduetothespeculatorlosingabilitytouseleveragetogeneratehighreturnsasthepriceofstockgoesupThespeculatormayalsopayaverylowpremiumathigherstockpricesbecausethereislessdownsideprotectionLeverageinValuingWarrants(cont’d)UseofWarrants

inCorporateFinanceAstraightdebtissuemaybecostlierduetoextremelyhighratesThesamesecuritymaybewellreceivedifdetachablewarrantsareincludedMaybeincludedasanadd-oninamergeroracquisitionagreementMaybeissuedinacorporatereorganizationorbankruptcytooffertheshareholdersachancetorecoverifrestructuringissuccessfulUseofWarrants

inCorporateFinance(cont’d)MaynotbeasdesirableasconvertiblesecuritiesforcreatingnewcommonstockFirmswithwarrantshavenooptionofforcingconversionofdebtintocommonstockTheonlypossibleincentiveisastep-upinexercisepriceWhereaprogressivelyhigheroptionpriceispaidifwarrantsarenotexercisedbyagivendateAccountingConsideration

withWarrantsAllwarrantsareincludedincomputingdilutedearningspershareNumberofnewsharescreatedbytheexerciseofwarrantsmustbecomputedDerivativeSecuritiesValuesderivedfromanunderlyingsecurityInthecaseofequityoptions,thevalueisderivedfromtheunderlyingcommonstockFuturescontractsongovernmentbondsandTreasurybillsderivetheirvaluefromthosegovernmentsecuritiesFuturescontractsonoilorwheathavethosecommoditiesasdeterminantsoftheirbasicvaluesOptionsOptionsAright,butnottheobligation,tobuyorsellanunderlyingsecurityatasetpriceforagiventimeperiod,e.g.,employeestockoptionCalloptionSimilartoemployeestockoptionbutusuallytradedbetweenindividualinvestorsAnoptiontobuysecuritiesatasetpriceforaspecifiedtimeperiodPutoptionAnoptiontosellsecuritiestotheoptionwriteratasetpriceforaspecifiedtimeperiodOftenusedashedgeagainstfallingsecuritypricesFuturesGivetheownertherightbutnottheobligationtobuyorselltheunderlyingsecurityorcommodi