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# Value of warrants

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1. A company has warrants on the market that allows people who own it to buy 1 share price at cost \$25.
a. Calculate the value of the security warrants of the organization if the common shares are sold each at the following rates: (1) \$ 20, (2) \$ 25, (3) \$ 30), (4) \$ 100.
(NOTE: The value of executing a warrant is the difference between the stock price and the purchase price specified in the warrant if the authorization is executed.)

2. The executives agreed that the industry should finance growth through the sale of common shares and no debt. However, they felt that the current \$42 for the price of the common shares of the company does not reflect its true value, they decided to sell a convertible security. Considered a convertible bond they feared the burden of fixed interest if the common stock does not increase enough in price to make conversion attractive. They decided to offer a convertible preferred stock, which paid a dividend of \$ 2.10 per share.
a. The conversion ratio will be 1.0; each part of the convertible preferred stock can be converted into a single part of a joint action. Therefore, the nominal value of the convertible (and the issue price) will be equal to the conversion price, which in turn will be determined as a reward ( the percentage by which the conversion price exceeds the stock price) on the current market price of the common stock. Which one if the conversion price if the award is set at 10% ? And award of 30%?

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This solution answers questions regarding warrants.

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## Warrants: Exercise Value of Warrants, Price of Warrants, Effect of different factors (life, variability, growth rate of stock price, dividend policy) on warrant's price, coupon interest rate on the bonds with warrants that the company wishes to sell.

Maese Industries Inc. has warrants outstanding that permit holders to purchase 1 share per warrant at a price of \$25.

a. Calculate the exercise value of the firm's warrants if the common sells at each of the following prices: (1) \$20, (2) \$25, (3) 30, (4) \$100. (Hint: A warrant's exercise value is the difference between the stock price and the purchase price specified by the warrant if the warrant were to be exercised.)

b. At what approximate price do you think the warrants would actually sell under each condition indicated above? What premium above? What premium above exercise value is implied in your price? Your answer is a guess, but your prices and premiums should bear reasonable relationships to one another.

c. How would each of the following factors affect your estimates of the warrants' prices and premiums in part b?
(1) The life of the warrant.
(2) Expected variability in the stock's price.
(3) The expected growth rate in the stock's price.
(4) The company announces a change in dividend policy: whereas it formerly paid no dividends, henceforth it will pay out all earnings as dividends.

d. Assume the firm's stock now sells for \$20 per share. The company wants to sell some 20-year, annual interest, \$1,000 par value bonds. Each bond will have attached 50 warrants, each exercisable into 1 share of stock at an exercise price of \$25.

The firm's straight bonds yield 12 percent. Regardless of your answer to part b, assume that each warrant will have a market value of \$3 when the stock sells at \$20. What coupon interest rate, and dollar coupon, must the company set on the bonds with warrants if they are to clear the market?

Textbook answers:
a. (1) -\$5 or \$0
(2) \$0
(3) \$5
(4)\$75

d. 10%; \$100

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