Warrants and Convertibles g modebadzeagruni edu ge Dilution

Warrants and Convertibles �������� g. modebadze@agruni. edu. ge

Dilution - ���� Balance Sheet Before (Book Value) Assets Gold: Total Assets Liabilities and Equity $3, 000 Debt $3, 000 Equity (2 shares) 0 $3, 000 Total $3, 000

Dilution - ���� Balance Sheet Before (Market Value) Assets Liabilities and Equity Gold: Cash: Total Assets $3, 500 Debt $1, 500 Equity (3 shares) $5, 000 Total Note that Mr. Armstrong’s claim falls in value from $1, 750 = $3, 500 ÷ 2 to $1, 666. 67 = $5, 000 ÷ 3 0 $5, 000 $3, 000

Warrant�� ���� ��Black-Scholes ��������� warrant-�� ������ = Note that when # = the original number of shares and #w = the number of warrants, ����� warrant-������������ �����

Convertible ����� • Litespeed, 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 straight bond value? – What is the conversion value? – What is the option value of the bond?

Convertible ����� – What is the straight bond value? –What is the conversion value? 25 shares × $12/share = $300 –What is the option value of the bond? $400 – 385. 54 = $14. 46

The Value of Convertible Bonds Convertible Bond Value Convertible bond values Conversion Value floor value Straight bond value floor value = conversion ratio Option value Stock Price

Quick Quiz • Explain how convertible bonds and warrants are similar to call options. • Explain how convertible bonds and warrants are different from call options. • Identify possible corporation benefits from issuing convertible bonds and/or warrants.