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Value of Equity and Per Share Value when there are options and warrants outstanding
Aswath Damodaran

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Equity Value and Per Share Value: A Test l Assume that you have done an equity valuation of Microsoft. The total value for equity is estimated to be $ 170 billion and there are 1204 million shares outstanding. What is the value per share?

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An added fact l On September 30, 1997, Microsoft had 258 million options outstanding, granted to employees over time. These options had an average exercise price of $ 42 (the current stock price i $ 140). Estimate the value per share.

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Equity Value and Per Share Value l l

The conventional way of getting from equity value to per share value is to divide the equity
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The Conversion Option l l

In a typical convertible bond, the bondholder is given the option to convert the bond into a specified number of shares of stock. The conversion ratio measures the number of shares of stock for which each bond may be exchanged. Stated differently, the market conversion value is the current value of the shares for which the bonds can be exchanged. The conversion premium is the excess of the bond value over the conversion value of the bond. The conversion option in a convertible bond is equity.

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Convertible Bond Value and the Conversion Option

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Determinants of Value of Conversion Option l The conversion option is a call option on the underlying stock, and its value is therefore determined by the variables that affect call option values –
– the underlying stock price, – the conversion ratio (which determines the strike price), – the life of the convertible bond, – the variance in the stock price and – the level of interest rates.

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Factors in Using Option Pricing Models to Value Convertibles and Warrants l Option pricing models can be used to value the conversion option with three caveats –
– conversion options are long term, making the assumptions about constant variance and constant dividend yields much shakier, – conversion options result in stock dilution, and – conversion options are often exercised before expiration, making it dangerous to use European option pricing

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