BAC-WT - Bank of America Warrants

[Green King]

please explain the reference

 

http://www.urbandictionary.com/define.php?term=burn%21

 

2. BURN! 1 thumb up

An insult that is totally epic.Probably more epic to Michael Kelso.

"Dude I just saw Donna with Kasey" "OOOO burn!"

The one before about

"Hal2000 has spoken.  You've got the wrong handle."

 

[ERICOPOLY]

It is okay to feel depressed when your portfolio is down 50%.  I do.

It is okay to feel euphoric when your portfolio is up 50%.  I do.

 

It is important to invest rationally despite these emotions.  That is what i try to do.

 

Not okay -- insulting others, acting condescendingly.  I've done it, but I'm not proud of it.

 

Ericopoly,

 

You wrote a post which I remember was quite delightful in its definition of life's happiness coming from making other people happy.  Do you remember in which thread it was?

 

Sorry but I don't.

[MrB]

Sorry to interrupt the he said, she said and this is what they really meant moment ;-) LTA

 

http://uk.reuters.com/article/2012/08/14/uk-mortgages-repurchases-idUKBRE87D14X20120814?feedType=RSS&feedName=GCA-GoogleNewsUK

 

 

..The government-controlled companies are squabbling with banks over who should bear the burden of losses from the housing crunch, in particular loans made between 2005 and 2008, when the market was at its frothiest....

 

..Fannie Mae and Freddie Mac's efforts will translate to higher mortgage losses for banks in the coming quarters. But the end of the fighting may be in sight. Fannie Mae, the larger of the two finance companies, is more than halfway through its review of loans to try to sell back to banks and is mainly focusing on that four-year period, a source familiar with the matter said...

 

..In the second quarter, outstanding repurchase requests at Fannie Mae grew by 20 percent to $14.6 billion from the first quarter, according to a filing last week.

 

Banks can argue about whether they really did follow guidelines, but the impact of buyback requests on lenders is clear. Bank of America Corp, Wells Fargo & Co, PNC Financial Services Group Inc and others set aside more money in the second quarter to cover repurchase requests.

 

Fannie Mae and Freddie Mac say they are trying to recover as much money as possible for taxpayers after receiving more than $188 billion of government support during the housing crunch. They have since repaid about $45 billion...

[xazp]

Notice anyone missing from this list?  They list all 7 banks that got subpoenas. 

 

http://www.forbes.com/sites/halahtouryalai/2012/08/15/7-banks-hit-with-libor-subpoenas-courtesy-of-ny-attorney-general-schneiderman/

 

 

[Parsad]

Notice anyone missing from this list?  They list all 7 banks that got subpoenas. 

 

http://www.forbes.com/sites/halahtouryalai/2012/08/15/7-banks-hit-with-libor-subpoenas-courtesy-of-ny-attorney-general-schneiderman/

 

But BAC was sued separately by a smaller investment firm in New York, along with a couple of other institutions.  The lawsuits will come, because everyone has their hands out now and the banks still have bad reputations.  But they will get settled for far less than the face value of any suit.  In a couple of years, no one will remember.  Look at BP!  You wouldn't even know they polluted the Gulf Coast for 2 months.  Cheers!

[Arden]

Hey guys, do you think the calculation here complies with the prospectus? http://www.gurufocus.com/news/170757/bac-warrants--dividend-adjusted-strike-price

 

I have noticed he does have a small mistake in not noticing the 0.01$ threshold is quarterly and not yearly but apart from that- if the strike price will indeed be around 10$ by 2019, then the current warrant pricing seems ridiculous.

 

 

[Rabbitisrich]

Seems like the author is knocking down the strike $ for $. The adjustment is based on the last trade price the day before the record date of the dividend.

[MrB]

Hey guys, do you think the calculation here complies with the prospectus? http://www.gurufocus.com/news/170757/bac-warrants--dividend-adjusted-strike-price

 

I have noticed he does have a small mistake in not noticing the 0.01$ threshold is quarterly and not yearly but apart from that- if the strike price will indeed be around 10$ by 2019, then the current warrant pricing seems ridiculous.

A spreadsheet for the actual formula was posted in this thread previously and until now, no mistakes have been pointed out, so you are probably better to go with that. For one the article makes no mention of the adjustment in warrant shares.

[Arden]

Found it, thanks.

 

This is really interesting- the longer the price is low, the more the warrants are actually worth. if we assume the stock price when we reach the strike date will be above the strike price, then any dividend distributed in the next few years is doubly leveraged: 1. The strike price is reduced by the ratio of the dividend as a part the stock price, so if the stock price is lower than the strike price, you get leverage  2. Since the warrant price is obviously always lower than stock price, any cent gained in the warrants is worth more.

A buyback is multiplied only by the second effect.

 

In certain circumstances, a cumulative dividend yield of 50% in the next 7 years equates to 100-200% on the warrants. I wonder if those who trade the warrants using black and scholes account for this.

 

Using the BS formula I reach a price for the warrant of 2.65 without accounting for any adjustment (Looking at option pricing for 2014, I assume the Vol. is about 40%) but I guess BS is no good here- the warrant price at 3.3 seems really cheap.

[xazp]

1. The strike price is reduced by the ratio of the dividend as a part the stock price, so if the stock price is lower than the strike price, you get leverage  >>

 

I'm not an expert on the warrants, but my reading was the strike was just reduced by the dividend amount (i.e. the amount of reduction has nothing to do with the stock price).  Am I missing something?

 

Found it, thanks.

 

This is really interesting- the longer the price is low, the more the warrants are actually worth. if we assume the stock price when we reach the strike date will be above the strike price, then any dividend distributed in the next few years is doubly leveraged: 1. The strike price is reduced by the ratio of the dividend as a part the stock price, so if the stock price is lower than the strike price, you get leverage  2. Since the warrant price is obviously always lower than stock price, any cent gained in the warrants is worth more.

A buyback is multiplied only by the second effect.

 

In certain circumstances, a cumulative dividend yield of 50% in the next 7 years equates to 100-200% on the warrants. I wonder if those who trade the warrants using black and scholes account for this.

 

Using the BS formula I reach a price for the warrant of 2.65 without accounting for any adjustment (Looking at option pricing for 2014, I assume the Vol. is about 40%) but I guess BS is no good here- the warrant price at 3.3 seems really cheap.

[ERICOPOLY]

1. The strike price is reduced by the ratio of the dividend as a part the stock price, so if the stock price is lower than the strike price, you get leverage  >>

 

I'm not an expert on the warrants, but my reading was the strike was just reduced by the dividend amount (i.e. the amount of reduction has nothing to do with the stock price).  Am I missing something?

 

The stock price at time of dividend impacts how many shares 1 warrant entitles you to at the strike price.  The lower the stock price at the time of the dividend, the more shares you can purchase with the warrant at the strike price (which adjusts lower with the dividend).  So you get the right to buy more shares at a lower strike.  A double win.

 

Reason for this (my thoughts):

Out in the real world a common stock holder gets his dividend and reinvests it in the stock -- he can get more shares of stock when the price is low, versus when the price is high.  So common stock holders would have a distinct advantage over the warrants if they got a lot of dividends when the stock is low.  So the warrant provision equalizes it.

 

See last paragraph of page S-28:

http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm

 

quoting:

The number of warrant shares will be increased to the number obtained by multiplying the number of warrant shares issuable upon exercise of a warrant immediately prior to such adjustment by the quotient of (a) the exercise price in effect immediately prior to the distribution giving rise to this adjustment divided by (b) the new exercise price as determined in accordance with the immediately preceding sentence.

 

[racemize]

1. The strike price is reduced by the ratio of the dividend as a part the stock price, so if the stock price is lower than the strike price, you get leverage  >>

 

I'm not an expert on the warrants, but my reading was the strike was just reduced by the dividend amount (i.e. the amount of reduction has nothing to do with the stock price).  Am I missing something?

 

The stock price at time of dividend impacts how many shares 1 warrant entitles you to at the strike price.  The lower the stock price at the time of the dividend, the more shares you can purchase with the warrant at the strike price (which adjusts lower with the dividend).  So you get the right to buy more shares at a lower strike.  A double win.

 

Reason for this (my thoughts):

Out in the real world a common stock holder gets his dividend and reinvests it in the stock -- he can get more shares of stock when the price is low, versus when the price is high.  So common stock holders would have a distinct advantage over the warrants if they got a lot of dividends when the stock is low.  So the warrant provision equalizes it.

 

See last paragraph of page S-28:

http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm

 

quoting:

The number of warrant shares will be increased to the number obtained by multiplying the number of warrant shares issuable upon exercise of a warrant immediately prior to such adjustment by the quotient of (a) the exercise price in effect immediately prior to the distribution giving rise to this adjustment divided by (b) the new exercise price as determined in accordance with the immediately preceding sentence.

 

 

saying it a different way, when the stock price is low, the dividend yield is high, giving the common stock holder an attractive return (or at least more attractive than other dividend plays), so the warrant gets a similar advantage.

[xazp]

OK, well I have a hard time parsing their legalize, and I'm not an expert in the warrants, but I read it differently:

 

The "if" part above your warrant adjustment says "excluding ordinary cash dividends (as defined below), dividends of our common stock and other dividends or distributions referred to in the preceding bullet point"

 

So I didn't take the part about increasing the # of shares to be applicable if/when they pay a larger dividend. 

 

I actually don't understand what they're trying to say at all, it's so convoluted. "if you ate cereal for breakfast (but not cheerios or chex) and also had a stomache ache but didn't take tums then read the 5th paragraph below; otherwise consult the 10th page of the bible, excluding the 5th word of every sentence unless it's a leap year" (and so on for 100 pages). 

 

 

 

1. The strike price is reduced by the ratio of the dividend as a part the stock price, so if the stock price is lower than the strike price, you get leverage  >>

 

I'm not an expert on the warrants, but my reading was the strike was just reduced by the dividend amount (i.e. the amount of reduction has nothing to do with the stock price).  Am I missing something?

 

The stock price at time of dividend impacts how many shares 1 warrant entitles you to at the strike price.  The lower the stock price at the time of the dividend, the more shares you can purchase with the warrant at the strike price (which adjusts lower with the dividend).  So you get the right to buy more shares at a lower strike.  A double win.

 

Reason for this (my thoughts):

Out in the real world a common stock holder gets his dividend and reinvests it in the stock -- he can get more shares of stock when the price is low, versus when the price is high.  So common stock holders would have a distinct advantage over the warrants if they got a lot of dividends when the stock is low.  So the warrant provision equalizes it.

 

See last paragraph of page S-28:

http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm

 

quoting:

The number of warrant shares will be increased to the number obtained by multiplying the number of warrant shares issuable upon exercise of a warrant immediately prior to such adjustment by the quotient of (a) the exercise price in effect immediately prior to the distribution giving rise to this adjustment divided by (b) the new exercise price as determined in accordance with the immediately preceding sentence.

 

[xazp]

OK, well I have a hard time parsing their legalize, and I'm not an expert in the warrants, but I read it differently:

 

The "if" part above your warrant adjustment says "excluding ordinary cash dividends (as defined below), dividends of our common stock and other dividends or distributions referred to in the preceding bullet point"

 

So I didn't take the part about increasing the # of shares to be applicable if/when they pay a larger dividend. 

 

I actually don't understand what they're trying to say at all, it's so convoluted. "if you ate cereal for breakfast (but not cheerios or chex) and also had a stomache ache but didn't take tums then read the 5th paragraph below; otherwise consult the 10th page of the bible, excluding the 5th word of every sentence unless it's a leap year."  This goes on for about 100 pages, and ... this is why I haven't participated in the warrants.

 

 

 

1. The strike price is reduced by the ratio of the dividend as a part the stock price, so if the stock price is lower than the strike price, you get leverage  >>

 

I'm not an expert on the warrants, but my reading was the strike was just reduced by the dividend amount (i.e. the amount of reduction has nothing to do with the stock price).  Am I missing something?

 

The stock price at time of dividend impacts how many shares 1 warrant entitles you to at the strike price.  The lower the stock price at the time of the dividend, the more shares you can purchase with the warrant at the strike price (which adjusts lower with the dividend).  So you get the right to buy more shares at a lower strike.  A double win.

 

Reason for this (my thoughts):

Out in the real world a common stock holder gets his dividend and reinvests it in the stock -- he can get more shares of stock when the price is low, versus when the price is high.  So common stock holders would have a distinct advantage over the warrants if they got a lot of dividends when the stock is low.  So the warrant provision equalizes it.

 

See last paragraph of page S-28:

http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm

 

quoting:

The number of warrant shares will be increased to the number obtained by multiplying the number of warrant shares issuable upon exercise of a warrant immediately prior to such adjustment by the quotient of (a) the exercise price in effect immediately prior to the distribution giving rise to this adjustment divided by (b) the new exercise price as determined in accordance with the immediately preceding sentence.

 

[ERICOPOLY]

1. The strike price is reduced by the ratio of the dividend as a part the stock price, so if the stock price is lower than the strike price, you get leverage  >>

 

I'm not an expert on the warrants, but my reading was the strike was just reduced by the dividend amount (i.e. the amount of reduction has nothing to do with the stock price).  Am I missing something?

 

The stock price at time of dividend impacts how many shares 1 warrant entitles you to at the strike price.  The lower the stock price at the time of the dividend, the more shares you can purchase with the warrant at the strike price (which adjusts lower with the dividend).  So you get the right to buy more shares at a lower strike.  A double win.

 

Reason for this (my thoughts):

Out in the real world a common stock holder gets his dividend and reinvests it in the stock -- he can get more shares of stock when the price is low, versus when the price is high.  So common stock holders would have a distinct advantage over the warrants if they got a lot of dividends when the stock is low.  So the warrant provision equalizes it.

 

See last paragraph of page S-28:

http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm

 

quoting:

The number of warrant shares will be increased to the number obtained by multiplying the number of warrant shares issuable upon exercise of a warrant immediately prior to such adjustment by the quotient of (a) the exercise price in effect immediately prior to the distribution giving rise to this adjustment divided by (b) the new exercise price as determined in accordance with the immediately preceding sentence.

 

 

saying it a different way, when the stock price is low, the dividend yield is high, giving the common stock holder an attractive return (or at least more attractive than other dividend plays), so the warrant gets a similar advantage.

 

Were the stock to trade at 50 cents and the dividend were also 50 cents, then the common stock holder could take the 50 cents and buy another share.

 

So the common stock holder would now have 2 shares, vs the warrant holder stuck with his one share.

 

So that scenario (without the share count adjustment) would take the shine off of the warrant.  Thus, the warrant has the adjustment for number of shares so that there is no  such situation where a low stock price opportunity puts the warrant holder at a disadvantage to the common..

[Rabbitisrich]

The exercise price is multiplied by the end of day before record date price [market price] minus the dividend, then divided by the [market price]. Then the shares issuable per warrant is multiplied by the old strike divided by new strike.

[Rabbitisrich]

 

Were the stock to trade at 50 cents and the dividend were also 50 cents, then the common stock holder could take the 50 cents and buy another share.

 

So the common stock holder would now have 2 shares, vs the warrant holder stuck with his one share.

 

So that scenario (without the share count adjustment) would take the shine off of the warrant.  Thus, the warrant has the adjustment for number of shares so that there is no  such situation where a low stock price opportunity puts the warrant holder at a disadvantage to the common..

 

And when common gets the $0.50, they have to reinvest at the market price. Warrant holders are reinvested at strike, mwahahaha (the benefit of this is reduced because the adjustment is %, not $ for $.)

 

One thing that I am not clear on is the exact calculation of payment at expiry. These warrants are a "net" exercise, so you just receive shares + cash payment for fractional shares. The language regarding the payment is a bit confusing.

[twacowfca]

OK, well I have a hard time parsing their legalize, and I'm not an expert in the warrants, but I read it differently:

 

The "if" part above your warrant adjustment says "excluding ordinary cash dividends (as defined below), dividends of our common stock and other dividends or distributions referred to in the preceding bullet point"

 

So I didn't take the part about increasing the # of shares to be applicable if/when they pay a larger dividend. 

 

I actually don't understand what they're trying to say at all, it's so convoluted. "if you ate cereal for breakfast (but not cheerios or chex) and also had a stomache ache but didn't take tums then read the 5th paragraph below; otherwise consult the 10th page of the bible, excluding the 5th word of every sentence unless it's a leap year" (and so on for 100 pages). 

 

 

 

1. The strike price is reduced by the ratio of the dividend as a part the stock price, so if the stock price is lower than the strike price, you get leverage  >>

 

I'm not an expert on the warrants, but my reading was the strike was just reduced by the dividend amount (i.e. the amount of reduction has nothing to do with the stock price).  Am I missing something?

 

The stock price at time of dividend impacts how many shares 1 warrant entitles you to at the strike price.  The lower the stock price at the time of the dividend, the more shares you can purchase with the warrant at the strike price (which adjusts lower with the dividend).  So you get the right to buy more shares at a lower strike.  A double win.

 

Reason for this (my thoughts):

Out in the real world a common stock holder gets his dividend and reinvests it in the stock -- he can get more shares of stock when the price is low, versus when the price is high.  So common stock holders would have a distinct advantage over the warrants if they got a lot of dividends when the stock is low.  So the warrant provision equalizes it.

 

See last paragraph of page S-28:

http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm

 

quoting:

The number of warrant shares will be increased to the number obtained by multiplying the number of warrant shares issuable upon exercise of a warrant immediately prior to such adjustment by the quotient of (a) the exercise price in effect immediately prior to the distribution giving rise to this adjustment divided by (b) the new exercise price as determined in accordance with the immediately preceding sentence.

 

 

 

Please realize that such doccuments are written by lawyers not to inform, but to provide employment to many other high priced lawyers who can decypher the confusing language. If it were not so, the authors of such confusion  would provide examples that clarify important points.  It's often helpful to diagram confusing doccuments to understand how all the clauses fit together.

[ERICOPOLY]

 

Were the stock to trade at 50 cents and the dividend were also 50 cents, then the common stock holder could take the 50 cents and buy another share.

 

So the common stock holder would now have 2 shares, vs the warrant holder stuck with his one share.

 

So that scenario (without the share count adjustment) would take the shine off of the warrant.  Thus, the warrant has the adjustment for number of shares so that there is no  such situation where a low stock price opportunity puts the warrant holder at a disadvantage to the common..

 

And when common gets the $0.50, they have to reinvest at the market price. Warrant holders are reinvested at strike, mwahahaha (the benefit of this is reduced because the adjustment is %, not $ for $.)

 

 

Yes you're right.  The common is the real winner if the stock stays really low for years and years and they pay a high dividend (and you have a low dividend tax rate).

 

[Arden]

 

Isn't the warrant the real winner if the stock remains low? A 50% dividend will reduce the strike price by 50%, and I can't even imagine what will happen with a 50c dividend on a 50c stock. This adjustment alone is enough to compensate for the ability of the stock holder to buy more, but now I understand there are actually another source of leverage I haven't noticed - the adjustment of number of shares.

 

Regarding the adjustment of number of shares per warrant- Right now that number is one, correct? So, let's say the stock price is 8$, the strike is 13$ and the stock pays a 1$ dividend.

 

For the stock holder- he will have a 7$ stock and 1$ dividend, he will invest it in the stock and will be in a similar situation to before.

 

for the warrant holder- the strike price will be reduced by 1/8 of the previous strike price + the number of shares issuable per warrant will increase by 1/7 (previous strike price divided by new one, and considering the previous sentence- this will be something like 8/7 in my example, since the price was reduced by 1/8 and the formula for number of shares will be 8/7 X old shares per warrant). So, now he has a lower strike and more shares per warrant, but the stock price is 1$ lower.

 

This is great for the warrant holder if, and only if, the price of the stock at 2019 after all those dividends will be above the strike price, but then again- as long as the stock is lower than the strike, a 10% decrease in strike price is necessarily larger than the 10% the share holder gets- like a catch 22- if the stock is above the strike price the warrant holder is happy, and if not- he gets leverage. So, as I see it, the share number adjustment is a bonus- and a really great one.

 

This seems too good to be true-Do you believe you get an adjustment to the strike price AND more share per warrant? It would be great if the paragraph explaining the adjustment were clearer.

[xazp]

I don't read it as true.  I think the language specifically excludes dividends:

"excluding ordinary cash dividends (as defined below), dividends of our common stock and other dividends or distributions referred to in the preceding bullet point"

 

My general reading is in some circumstances you get the strike adjusted, and in others, you get the shares adjusted - but not both. 

I'd be glad to be corrected. 

 

 

 

 

Isn't the warrant the real winner if the stock remains low? A 50% dividend will reduce the strike price by 50%, and I can't even imagine what will happen with a 50c dividend on a 50c stock. This adjustment alone is enough to compensate for the ability of the stock holder to buy more, but now I understand there are actually another source of leverage I haven't noticed - the adjustment of number of shares.

 

Regarding the adjustment of number of shares per warrant- Right now that number is one, correct? So, let's say the stock price is 8$, the strike is 13$ and the stock pays a 1$ dividend.

 

For the stock holder- he will have a 7$ stock and 1$ dividend, he will invest it in the stock and will be in a similar situation to before.

 

for the warrant holder- the strike price will be reduced by 1/8 of the previous strike price + the number of shares issuable per warrant will increase by 1/7 (previous strike price divided by new one, and considering the previous sentence- this will be something like 8/7 in my example, since the price was reduced by 1/8 and the formula for number of shares will be 8/7 X old shares per warrant). So, now he has a lower strike and more shares per warrant, but the stock price is 1$ lower.

 

This is great for the warrant holder if, and only if, the price of the stock at 2019 after all those dividends will be above the strike price, but then again- as long as the stock is lower than the strike, a 10% decrease in strike price is necessarily larger than the 10% the share holder gets- like a catch 22- if the stock is above the strike price the warrant holder is happy, and if not- he gets leverage. So, as I see it, the share number adjustment is a bonus- and a really great one.

 

This seems too good to be true-Do you believe you get an adjustment to the strike price AND more share per warrant? It would be great if the paragraph explaining the adjustment were clearer.

[Arden]

Hey xazp. The language does not exclude dividends, it excludes ordinary cash dividends which are defined later in the Prospectus. I'll  explain.

 

From the prospectus:

Ordinary cash dividends will not include any cash dividends paid subsequent to January 16, 2009 to the extent the aggregate per share dividends paid on our outstanding common stock in any quarter exceed $0.01, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction

 

So, from this we learn that ordinary cash dividends ("OCD")do not include the part of the dividend that exceeds 0.01$- to rephrase: OCD are not the part above 0.01$, or in other words- OCD is only the part below or that equals 0.01$. 

 

Now to the quote you bring:

If we fix a record date for making a distribution to all holders of our common stock of securities, evidences of indebtedness, assets, cash, rights or warrants (excluding ordinary cash dividends (as defined below), dividends of our common stock and other dividends or distributions referred to in the preceding bullet point), the exercise price in effect prior to such record date will be reduced immediately thereafter to the price determined by multiplying the exercise price in effect immediately prior to the reduction by the quotient of ....

 

Again, to rephrase- In the case of dividends which exclude OCD, we will adjust. From the previous qote, we learned what exactly is OCD, so, combining both phrases:

In case of dividends, we will adjust for the dividend, excluding the part that is below or equals 0.01$.

[xazp]

You are right, I stand corrected.

 

I've also been wrong thinking that the strike is adjusted down by the dividend amount in $/share.  Instead, it's adjusted down by the dividend yield. 

 

I'll have to think about this one some more.  Thanks for taking the time to explain it to me. 

 

Hey xazp. The language does not exclude dividends, it excludes ordinary cash dividends which are defined later in the Prospectus. I'll  explain.

 

From the prospectus:

Ordinary cash dividends will not include any cash dividends paid subsequent to January 16, 2009 to the extent the aggregate per share dividends paid on our outstanding common stock in any quarter exceed $0.01, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction

 

So, from this we learn that ordinary cash dividends ("OCD")do not include the part of the dividend that exceeds 0.01$- to rephrase: OCD are not the part above 0.01$, or in other words- OCD is only the part below or that equals 0.01$. 

 

Now to the quote you bring:

If we fix a record date for making a distribution to all holders of our common stock of securities, evidences of indebtedness, assets, cash, rights or warrants (excluding ordinary cash dividends (as defined below), dividends of our common stock and other dividends or distributions referred to in the preceding bullet point), the exercise price in effect prior to such record date will be reduced immediately thereafter to the price determined by multiplying the exercise price in effect immediately prior to the reduction by the quotient of ....

 

Again, to rephrase- In the case of dividends which exclude OCD, we will adjust. From the previous qote, we learned what exactly is OCD, so, combining both phrases:

In case of dividends, we will adjust for the dividend, excluding the part that is below or equals 0.01$.

[ERICOPOLY]

For the stock holder- he will have a 7$ stock and 1$ dividend, he will invest it in the stock and will be in a similar situation to before.

 

Prior to the dividend, the common stock holder had roughly a $2 per share theoretical earning power at 1% ROA.

 

Now it has been increased by 1/7, so he now has $2.28 per share (I don't literally mean "per share" given that I'm adding the 1/7 to the original shares) of theoretical earning power.

 

So he is not in a similar situation to before.  From a market value standpoint on the day of the dividend, if it's trading at $7 then yes it still adds up to $8.  The change will be more obvious to see when the stock is trading a 10x 1% ROA -- perhaps many years from now.

 

 

[Arden]

xazp, glad I could help :)

 

Eric,You're right, but it's probably a little less than 2.28$, because 2.28 assumes they have nothing at all to do with the money they distributed, but they will surely have something to do with it which could yield a few percent, and that's lost.

 

At any rate, if the adjustments are both a reduction in strike price and an increase in warrant shares (This still just seems too good to be true to me) then it is much more powerful than a dividend. Even if it's only one or the other- I'd prefer it to a regular dividend.