EQUITY CONVERTIBLES AND WARRANTS

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SUMMARY

This module teaches the participant about the different characteristics of equity and equity–related securities. The pricing of equity securities is explained. Attention is given to the concept of optimum capital structure and how it and Earnings Before Interest and Taxes–Earnings Per Share (EBIT–EPS) Analysis are used for the decision to issue equity or debt by the firm. The valuation of convertibles and warrants is covered.

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OBJECTIVES

Upon completing this module, you will be able to:

1. Explain the characteristics of each of the following:

a. equity

b. convertible bond

c. warrant

2. Discuss factors affecting the price of stock.

3. Explain systematic and unsystematic risk.

4. Discuss the concept of optimum capital structure and the impact issuing debt or equity has on the cost of capital to the firm.

5. Conduct EBIT–EPS Analysis to determine an optimum financing plan.

6. Identify the benefits to issuers and investors of coupon convertible bonds.

7. Calculate the price and breakevens of coupon convertible bonds.

8. Identify the benefits to issuers and investors of LYONs.

9. Calculate the conversion premium and breakeven of a LYON.

10. List the features and pricing characteristics of an equity warrant.

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