FunFinMan, Inc., is currently financed entirely with common stock. The firm is composed of $10 million in common stock ($5 par value) and $20 million in retained earnings. The company is considering issuing $20 million of 8%, 20-year debentures including 1 warrant per bond that can be converted into 5 shares of common stock at an exercise price of $40 per share. How will this impact the capitalization of the firm?
Example of Exercise of Warrants
Debentures $ 0 $ 10
Debentures $ 0 $ 10
Common stock ($5 par) 10 10
Additional paid-in capital 0 0
Retained earnings 20 20
Shareholders’ equity $ 30 $ 30
Total Capitalization $ 30 $ 40
Before After FinancingFinancing Example of Exercise of Warrants (in millions)
Debentures $ 0 $ 10
Debentures $ 0 $ 10
Common stock ($5 par) 10 10.5
Additional paid-in capital 0 3.5
Retained earnings 20 20
Shareholders’ equity $ 30 $ 34
Total Capitalization $ 30 $ 44
Before After FinancingExercise Example of Exercise of Warrants (in millions)
Theoretical value of a warrant:
Theoretical value of a warrant:
max [ (N)(Ps) – E, 0]
N = number of shares per warrant
Ps = market price of one share of stock
E = exercise price associated with the purchase of N shares
Warrant Value Associated Common Stock Price Theoretical value line 45o Market value line Exercise price Valuation of a Warrant
