1. The McGraw-Hill Companies, Inc., 2000
Principles of Corporate Finance
Brealey and Myers Sixth Edition
Warrants and Convertibles
Slides by
Matthew Will
Chapter 22
Irwin/McGraw Hill
The McGraw-Hill Companies, Inc., 2000

2. Topics Covered What is a Warrant? What is a Convertible Bond?
The Difference Between Warrants and Convertibles
Why do Companies Issue Warrants and Convertibles?

3. Warrant price at maturity BJ Services share price
Warrant Value
Example:
BJ Services warrants, January 1999
Exercise price $ 15
Warrant price $ 9
Share price $ 16
Warrant price at maturity
BJ Services share price 15

4. Warrant Value vs. Stock Price
Value of warrant
Actual warrant value prior to expiration
Theoretical value (warrant lower limit)
Stock price
Exercise price = $15

5. United Glue Warrants
United glue has just issued $2 million package of debt and warrants. Using the following data, calculate the warrant value.
# shares outstanding = 1 mil
Current stock price = $12
Number of shares issued per share outstanding = .10
Total number of warrants issued = 100,000
Exercise price of warrants = $10
Time to expiration of warrants = 4 years
Annualized standard deviation of stock daily returns = .40
Rate of return = 10 percent

6. United Glue Warrants
United glue has just issued $2 million package of debt and warrants. Using the following data, calculate the warrant value.

7. United Glue Warrants
United glue has just issued $2 million package of debt and warrants. Using the following data, calculate the warrant value.
(d1) =
(d2) = .304
N(d2) = .620
N(d1) = .865

8. United Glue Warrants Warrant = 12[.865] - [.620]{10/1.14] = $6.15
United glue has just issued $2 million package of debt and warrants. Using the following data, calculate the warrant value.
Warrant = 12[.865] - [.620]{10/1.14]
= $6.15

9. United Glue Warrants
United glue has just issued $2 million package of debt and warrants. Using the following data, calculate the warrant value.
Value of warrant with dilution

10. United Glue Warrants
United glue has just issued $2 million package of debt and warrants. Using the following data, calculate the warrant value.
Value of warrant with dilution

11. United Glue Warrants
United glue has just issued $2 million package of debt and warrants. Using the following data, calculate the warrant value.
Value of warrant with dilution

12. What is a Convertible Bond?
ALZA
5% Convertible 2006
Convertible into 26.2 shares
Conversion ratio 26.2
Conversion price = 1000/26.2 = $38.17
Market price of shares = $28

13. What is a Convertible Bond?
ALZA
5% Convertible 2006
Convertible into 26.2 shares
Conversion ratio 26.2
Conversion price = 1000/26.2 = $38.17
Market price of shares = $28
Lower bound of value
Bond value
Conversion value = 26.2 x 28 =

14. What is a Convertible Bond?
How bond value varies with firm value at maturity.
Bond value ($ thousands)
bond repaid in full
default

15. What is a Convertible Bond?
How conversion value at maturity varies with firm value.
Conversion value ($ thousands)

16. What is a Convertible Bond?
How value of convertible at maturity varies with firm value.
Value of convertible ($ thousands)
convert
bond repaid in full
default