Beruflich Dokumente
Kultur Dokumente
Preferred Stocks
• Classified as equity
Recipeint
Individuals Corporations
• Certificate issued by a company that gives the holder the right to buy a stated number of shares
of the company’s stock at a specified price for some specified length of time.
• Used to induce investors to buy long term debt with lower interest
WARRANTS- VALUATION
WARRANTS IN FINANCING
• Enables the investors to share in the company’s growth assuming it does fact grow and prosper
• Virtually detachable
THREE CAUSES TO EXERCISE WARRANTS
• When warrants is about to expire and the market price of the stock price is above the exercise
price.
Percentage
Assume $250 million is the worth immediately after issuing bond with warrants and expected to
grow at 9% per year.
$877.11
• 6. Compute common stock intrinsic value after conversion of warrants into share
through warrants
CONVERTIBLE SECURITIES
• Bonds or preferred stocks that, under specified terms and conditions can be exchanged for
common stock at the option of the holder.
• Does not provide new capital; debt is simply replaced on the balance sheet by common stock
Convertible Securities
• Conversion Ratio – number of shares of stock a bondholder will receive upon conversion
• Conversion Price- effective price investors pay for common stock when conversion occurs
Use of Convertibles in Financing
• Offer the company chance to sell debt with low interest rate in exchange forgiving holders a
chance to participate in company’s success if it does well
• A way to sell common stock at a prices higher than those currently prevailing
Bait and Switch- a conflict between bondholders and stockholders due to asset substitution.
Agency cost – debt holders charge a higher interest rate to compensate for the bait and switch
instances.
• Bait and Switch- a conflict between bondholders and stockholders due to asset substitution.
• Agency cost – debt holders charge a higher interest rate to compensate for the bait and switch
instances.
When is best to issue Convertible securities?
• If the company would want to finance with straight debt but lenders are afraid the funds will be
invested in manner that increases the firm’s risk profile
• If the company wants to issue stocks but thinks such move would cause the investors to
interpret stock offering signals of tough times ahead.
Convertible VS Warrants
• Warrants bring new capital; Convertible securities results only in an accounting transfer
• Warrants expire before the debts maturity; Convertibles expire with debt maturity
• Warrants provide fewer future common shares; Convertibles convert all debt into common
stocks
• Warrants suggests interest to sell a debt; Convertibles suggests interest in selling common
stocks
• Warrants has issuance cost, underwriting fees; underwriting for convertibles are most like those
associated with the straight debt.
• Basic Earning per share- earnings available to common stockholders divided by the average
number of shares actually outstanding during the period>
• Diluted earnings per share- earnings that would have been available to common stockholders
divided by the average number of shares that would have been outstanding if “dilutive
securities” had been converted.