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©2012 McGraw-Hill Ryerson Limited 1 of 36 Learning Objectives 5.Calculate the conversion value of a convertible security. (LO5) 6.Describe warrants and compare them to convertible securities. (LO6) 7.Calculate the intrinsic value and the speculative premium on a warrant. (LO7) 8.Show how convertible securities and warrants affect earnings per share as reported on the income statement. (LO8)
©2012 McGraw-Hill Ryerson Limited 2 of 36 Warrant: –an option to buy a stated number of shares of common stock at a specified price over a given time period (a long-term option to buy stock) –may be attached to another security issue. Investor can usually detach and sell warrants separately –may be issued “stand-alone” –is highly speculative for the investor, as its value is dependent on the market movement of the stock –has a large potential for appreciation if the price of the stock goes up LO6 Warrants
©2012 McGraw-Hill Ryerson Limited 3 of 36 Table 19-2 Relationships determining warrant prices, October 2011 LO6 Source: www.Canadianwarrants.com (1)(2)(3)(4)(5)(6)(7) Firm Warrant Price Share Price Exercise Price Intrinsic Value (3) - (4) Speculative Premium (2) - (5) Expiry Date Brick Group (BRK.WT)$1.65$2.43$1.00$1.43$0.22May 2014 Crocodile Gold (CRK.WT) 0.175 0.79 2.250 0.175Mar. 2016 Canadian Western Bank (CWB.WT) 18.7230.9314.0016.931.79Mar. 2014
©2012 McGraw-Hill Ryerson Limited 4 of 36 Review of Formulas (b) 3. Intrinsic value of a warrant I = (M - E) x N(19-3) where I = Intrinsic value of a warrant M = Market value of a common stock E = Exercise price of a warrant N = Number of shares each warrant entitles the holder to purchase 4.Speculative premium of a warrant S = W - I(19-4) where S = Speculative premium W = Warrant price I = Intrinsic value LO6
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