Its about Warrants ( Financial Instrument )

1. Warrants
By
Muhammed Nowfal S
MSN Institute of Management

2. • A warrant is an option to purchase a specified number
of shares at a specified price during or at the expiry of
a specified period
• a warrant gives the holder the right to purchase from
the company a fixed number of shares in future at a
pre-determined price.
• The holder of the warrant may be allowed to transfer
or sell his right in the secondary market or to keep the
right as an investment.
• The holder of a warrant can choose whether or not to
exercise the option
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MSN Institute of Management

3. • warrants are not a major source of funds, their
characteristics may help the company to attain
the desired capital structure.
• Warrants are generally issued with other
securities (a bond or a preference share)
• Warrants may be attached to a debt issue to
work as a sweetener and to add to the
marketability of the issue
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MSN Institute of Management

4. • The warrant contains provisions for :
1. the number of shares that can be
purchased per warrant
2. the price at which the warrant can
be exercised.
3. the warrant expiration date.
• Warrant holders are not entitled to any
dividends nor do they have any voting
power.
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MSN Institute of Management

5. Warrants and convertible
securities

6. • Convertible Security – A bond or a
preferred stock that is convertible into a
specified number of shares of common
stock at the option of the holder.
• A convertible security requires surrender
of the security in exchange for the equity
shares
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MSN Institute of Management

7. • This provides the convertible holder a fixed
return (interest or dividend) and the option
to exchange a bond or preferred stock for
common stock.
• The option allows the company to sell
convertible securities at a lower yield than
it would have to pay on a straight bond or
preferred stock issue.
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MSN Institute of Management

8. • Warrant – A relatively long-term option to
purchase common stock at a specified
exercise price over a specified period of
time.
• A warrant, on the other hand, requires a
surrender of the warrant plus the payment
of additional cash, called the option price
or the exercise price, in order to obtain the
equity shares.
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MSN Institute of Management

9. • Warrants are issued by a company to
investors who may exercise them to buy
the shares or may re-sell them to other
investors.
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MSN Institute of Management

10. • A convertible security issue gives the
holder the right to receive equity shares
through the exchange of the convertible
for the equity shares; the warrant entitles
the security holder to purchase equity
share at a specified price.
• Both securities provide the purchaser with
the opportunity for a speculative gain if the
company is successful and the market
price of the equity share increases.
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MSN Institute of Management

11. • If the warrant is converted then the capital
structure is shifted to a relatively lower
leverage position because new equity
capital is issued without any change in
debts. If convertible securities are
converted then the reduction in leverage
would be more pronounced because new
equity share would be issued with a
reduction in debt.
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MSN Institute of Management

12. Warrants and share right

13. • The purpose of the warrant may be to make a debt
issue or a preference capital issue attractive, whereas
the right has an objective of raising fresh funds as well
to maintain the prorata share holding of the existing
shareholders.
• The share right is generally exercised in a short period
of one month or so, whereas warrants are generally
convertible after a year or so
• The right shares are generally issued at a price lower
than the prevailing market, whereas the conversion
price of the warrants may be kept slightly higher than
the current prevailing market price
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MSN Institute of Management

14. Features of Warrants
• Warrants are issued by attaching them to other
securities.
• Warrants can be traded as a separate instrument.
• The number of equity shares that can be purchased is
fixed
• The exercise price is also fixed.
• Warrants carry no voting rights and are not entitled to
receive dividend or interest payment
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MSN Institute of Management

15. Valuations o f warrants

16. Theoretical value
• The theoretical value of a warrant equals the
difference between the market price of the
equity shares purchased through warrants and
the total option price paid for these shares to
the company.
• TVw = (MP - OP) x N
In case, a warrant entitles to purchase only one equity
share, then the
• TVw = (MP - OP)
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MSN Institute of Management

17. Market value
• The warrant has a market value also
• The market value of a warrant equals or exceeds the
theoretical value of the warrant
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MSN Institute of Management

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MSN Institute of Management

19. • The market value of a warrant depends upon many
factors such as:
(i) Share price: A higher share price will increase the
value of a warrant.
(ii) Offer price: A higher offer price will mean a lower
value for the warrant as the warrant holder must pay
more for the shares purchased.
(iii) Underlying risk: The total risk of the volatility of the
share price also affects the market value of the
warrant.
(iv) Time to expiry: The longer the time to expiry, the
higher would be the value of the warrant.
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MSN Institute of Management

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MSN Institute of Management