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Economics of equity kickers ?

  1. Jul 20, 2009 #1
    Hi,

    I am trying to understand the economics behind a company choosing a financing method over the other. I am not sure if my logic is correct. Can you please review and comment? Please see my calculations in the excel file located http://www.filedropper.com/regularvsexoticoffering"

    The company has two choices for raising equity by selling 10 million shares. The stock last closed at $17.10.

    1. Regular offering – The stock needs to be offered at an 8% discount to its recent close. In addition, the dealer charges 5% fees on the gross amount raised. The company would get $15.21 per share.

    2. Exotic offering - The company sells 1 share + 0.67 warrant for $17.10. In this offering the company sells 6 million shares and 4 million warrants. The warrants have a 1 year term and a strike price of $17.53. Here also the dealer will charge a fee of 5% on the gross amount raised ($17.10 * 6 million).
    One clear advantage of this offering is that when the holder will exercise the warrant, all the money will straight away go to the company, without any market discount (8%) and dealer fees (5%).

    The company chose the exotic offering.

    I tried to analyze the issue from two sides.

    1. A full warrant’s intrinsic value, using the BS model, is $1.62, i.e. a 2/3 warrant costs $1.085. After stripping of the call premium of $1.085, the economic value of 1 share is $16.02. However, this approach doesn’t tell me how much money the company will have raised by issuing 10 million shares.

    2. I assumed that 6 million shares were issued at $16.25 (i.e. $17.10 x 0.95). I also assumed that the holder will exercise the 4 million warrants in 1 year, and the company will get $17.53 per share issued against those warrants. Thus the company will issue the 10 million shares at a weighted average price of $16.76. I wish to ignore the time value aspect.

    However, I have a feeling that the price $16.76 is too high as compared to the $15.21 achieved by the regular offering.

    Either I am double counting the warrant premium ($1.085) or the assumption that all 4 million warrants will be exercised is not correct. Can you please help me understand this issue?

    Thanks,

    MG.
     
    Last edited by a moderator: Apr 24, 2017
  2. jcsd
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