BAC-WT - Bank of America Warrants

[ERICOPOLY]

Where did you see Moynihan mention 1/3 buybacks, 1/3 dividends, 1/3 retained?  I don't recall reading/hearing this.

So if you pay $9 for the stock, that's a 14.8% payout growing at 5% per annum if you use his projection of 1/3 of earnings is retained and we get a 15% return on tangible equity.

 

The "payout" I mention is not a dividend yield -- it's the combination of dividends and buybacks (you can choose to sell an offsetting amount of shares to their buyback in order to get a cash payout).

 

He said it in an interview when somebody asked him about capital return.  But I've since tried to find it again a month or two ago and I couldn't come up with it.

 

He didn't say it this year.  I guarantee I heard him say it though -- it struck me as very rigid.

[ERICOPOLY]

But of course they don't keep repeating the 1/3 rule the way I do.  So perhaps he was castigated by the board or by his CFO and told to stop talking about it until they are all ready to agree on what it ought to be.

[Parsad]

So the roughly $2/share in earnings also jives with their overview on normalized PTPP analysis. 

 

But my question for the board is, if BAC trades at a 10x multiple, that's a $20 share price, then why the interest in the warrants? 

 

Go directly to BAC's Investor page and look up presentations.  That link wasn't working for me either, but when I went to their website myself, it worked after registering.  Cheers!

 

The other thing I found in that webcast is Moynihan directly stated that he thinks they will earn 13%,14%,15% returns on tangible equity.

 

Tangible equity being $13.50 today, and already at 9% B3 including a 50 bps buffer, this would indicate typical earnings of between $1.75 - $2.025 per share.

 

I need to watch the webcast again, but I believe that Moynihan was talking about 13%,14%,15% returns on tangible equity after the planned expense reductions and LAS expense runoff.

 

So they'd be doing better than that if interest rates get more favorable.

 

Yes that is correct.  That was what he was saying.  Cheers!

[ERICOPOLY]

But my question for the board is, if BAC trades at a 10x multiple, that's a $20 share price, then why the interest in the warrants? 

 

I'm not sure what the class B warrants would trade at if the stock were at $20 in a year or two, but let's optimistically say it will trade at $3.00 for simplicity.

 

A person buys the A warrant today for $3.80 and then in a year or two shorts the B warrant to recover $3.  That leaves only 80 cents on the table yet still room for incredible upside, considering the A warrants in the end might have a final strike of $10 and adjust to maybe 1.2x shares.

 

So, that might be effectively a $10 strike 2019 call priced at $3 that can be monetized in 2019 for $20, only you can extract perhaps 79% of your cost basis in a year or two if it runs to $20.

 

That's how I view the A warrants.

[Parsad]

Where did you see Moynihan mention 1/3 buybacks, 1/3 dividends, 1/3 retained?  I don't recall reading/hearing this.

So if you pay $9 for the stock, that's a 14.8% payout growing at 5% per annum if you use his projection of 1/3 of earnings is retained and we get a 15% return on tangible equity.

 

The "payout" I mention is not a dividend yield -- it's the combination of dividends and buybacks (you can choose to sell an offsetting amount of shares to their buyback in order to get a cash payout).

 

He said it in an interview when somebody asked him about capital return.  But I've since tried to find it again a month or two ago and I couldn't come up with it.

 

He didn't say it this year.  I guarantee I heard him say it though -- it struck me as very rigid.

 

He did say it in the past.  I don't think it was rigid though.  His main point was that the business was going to grow organically and the bulk of the earnings would go back to shareholders in dividends and buybacks.  Even in the CNN/Money article from July 2011, he says:

 

When BofA has built up a sufficient capital cushion, probably two to three years from now, Moynihan plans to return all

earnings to investors in dividends or share buybacks -- we're talking about $25 billion a year, all stuffing shareholders'

pockets. "We need to get back most of the shares we issued in the crisis, that caused all the dilution," says Moynihan. It's a

classic value strategy of growing modestly without plowing profits back into the business.

 

Cheers!

[thomcapital]

This is a pretty clear answer on capital allocation from the Bernstein Strategic Decisions Conference, 5/30/12. (The call was mentioned on page #78 of this thread for reference, I took this from the transcript on Bloomberg, but the translation is not perfect.)

 

John Eamon McDonald

And when you do get back to returning capital, how will you think about buybacks versus dividends? Do you feel some obligation to give some of those shares back?

 

Brian T. Moynihan

I think that we've been saying for a while now and it's sort of similar to what the Fed, I think the recurring dividend issue is that – I think we talk about paying 30% of earnings as we earn them is the thought process. And now all the rest of it there is for there to be returned either as a special dividend or a stock buyback and, at our discount, [ph] to tangible book the stock would be the way to go in the near term (41:09). And so but we didn't – but the – [ph] you got to start from principals (41:13). We do not need capital to grow the core businesses in the company. And you'd say, well, how does that happen? And the reality is if you think about the run-off portfolio being replaced by core assets, that's $70 billion. It's a 10% to 15% growth on the core loan portfolio that will be coming off at the same time we're putting it on. And if I have stress on that, that would be a good thing with the right credit quality. And you should say then, that's terrific, Brian, keeps more capital. So you really don't have a need to sort of grow the balance sheet size-wise to grow the earnings because you still have the run-off portfolio. You have certain assets in the trading book that will run-off and provide some capital lift in all of those types of things.

 

So really every dollar we earn will be – will create more than a dollar of capital because of DTA and will be free because we don't need to grow the balance sheet to grow the businesses. And so the question is – think of a 30% payout ratio when we get approval, when we earn it. And then the rest have a dialog and most investors say, at this price, buy it and then if we have the – a champagne problem that we're above tangible book and things like that, then we can talk about what the best use is. But I've heard nobody say not to use it to buy the stock until you hit the tangible book.

[Parsad]

This is a pretty clear answer on capital allocation from the Bernstein Strategic Decisions Conference, 5/30/12. (The call was mentioned on page #78 of this thread for reference, I took this from the transcript on Bloomberg, but the translation is not perfect.)

 

John Eamon McDonald

And when you do get back to returning capital, how will you think about buybacks versus dividends? Do you feel some obligation to give some of those shares back?

 

Brian T. Moynihan

I think that we've been saying for a while now and it's sort of similar to what the Fed, I think the recurring dividend issue is that – I think we talk about paying 30% of earnings as we earn them is the thought process. And now all the rest of it there is for there to be returned either as a special dividend or a stock buyback and, at our discount, [ph] to tangible book the stock would be the way to go in the near term (41:09). And so but we didn't – but the – [ph] you got to start from principals (41:13). We do not need capital to grow the core businesses in the company. And you'd say, well, how does that happen? And the reality is if you think about the run-off portfolio being replaced by core assets, that's $70 billion. It's a 10% to 15% growth on the core loan portfolio that will be coming off at the same time we're putting it on. And if I have stress on that, that would be a good thing with the right credit quality. And you should say then, that's terrific, Brian, keeps more capital. So you really don't have a need to sort of grow the balance sheet size-wise to grow the earnings because you still have the run-off portfolio. You have certain assets in the trading book that will run-off and provide some capital lift in all of those types of things.

 

So really every dollar we earn will be – will create more than a dollar of capital because of DTA and will be free because we don't need to grow the balance sheet to grow the businesses. And so the question is – think of a 30% payout ratio when we get approval, when we earn it. And then the rest have a dialog and most investors say, at this price, buy it and then if we have the – a champagne problem that we're above tangible book and things like that, then we can talk about what the best use is. But I've heard nobody say not to use it to buy the stock until you hit the tangible book.

 

Yeah, that is pretty clear...thanks!  Maybe he reads this board already, as that is pretty much what many of us have been saying for a while.  Cheers! 

[treasurehunt]

So the roughly $2/share in earnings also jives with their overview on normalized PTPP analysis. 

 

But my question for the board is, if BAC trades at a 10x multiple, that's a $20 share price, then why the interest in the warrants? 

 

With the stock trading at $9.12 and the A warrant at $3.80, I calculate a break-even stock price of about $23. So if the stock trades above $23 in the next six years, the warrants will have better returns than the stock. If the current IV is close to $20, it is not a stretch to think that the IV in six years could be around $30 and that the stock could trade somewhere near IV in the next six years.

 

Nevertheless, I prefer the stock to the warrants. If the stock goes to $23 in the next six years, the annual return will be at least 17%. I will sleep better sticking with a comparatively safe 17%, so I'll forgo the potentially higher return from the warrants.

[ERICOPOLY]

This is a pretty clear answer on capital allocation from the Bernstein Strategic Decisions Conference, 5/30/12. (The call was mentioned on page #78 of this thread for reference, I took this from the transcript on Bloomberg, but the translation is not perfect.)

 

John Eamon McDonald

And when you do get back to returning capital, how will you think about buybacks versus dividends? Do you feel some obligation to give some of those shares back?

 

Brian T. Moynihan

I think that we've been saying for a while now and it's sort of similar to what the Fed, I think the recurring dividend issue is that – I think we talk about paying 30% of earnings as we earn them is the thought process. And now all the rest of it there is for there to be returned either as a special dividend or a stock buyback and, at our discount, [ph] to tangible book the stock would be the way to go in the near term (41:09). And so but we didn't – but the – [ph] you got to start from principals (41:13). We do not need capital to grow the core businesses in the company. And you'd say, well, how does that happen? And the reality is if you think about the run-off portfolio being replaced by core assets, that's $70 billion. It's a 10% to 15% growth on the core loan portfolio that will be coming off at the same time we're putting it on. And if I have stress on that, that would be a good thing with the right credit quality. And you should say then, that's terrific, Brian, keeps more capital. So you really don't have a need to sort of grow the balance sheet size-wise to grow the earnings because you still have the run-off portfolio. You have certain assets in the trading book that will run-off and provide some capital lift in all of those types of things.

 

So really every dollar we earn will be – will create more than a dollar of capital because of DTA and will be free because we don't need to grow the balance sheet to grow the businesses. And so the question is – think of a 30% payout ratio when we get approval, when we earn it. And then the rest have a dialog and most investors say, at this price, buy it and then if we have the – a champagne problem that we're above tangible book and things like that, then we can talk about what the best use is. But I've heard nobody say not to use it to buy the stock until you hit the tangible book.

 

Thanks, that's pretty dang sweet.  100% of generated capital will be returned for a while because, as Brian says, they have enough capital already to redepoly into the business as that runoff portfolio runs off.

[onyx1]

So the roughly $2/share in earnings also jives with their overview on normalized PTPP analysis. 

 

But my question for the board is, if BAC trades at a 10x multiple, that's a $20 share price, then why the interest in the warrants? 

 

With the stock trading at $9.12 and the A warrant at $3.80, I calculate a break-even stock price of about $23. So if the stock trades above $23 in the next six years, the warrants will have better returns than the stock. If the current IV is close to $20, it is not a stretch to think that the IV in six years could be around $30 and that the stock could trade somewhere near IV in the next six years.

 

Nevertheless, I prefer the stock to the warrants. If the stock goes to $23 in the next six years, the annual return will be at least 17%. I will sleep better sticking with a comparatively safe 17%, so I'll forgo the potentially higher return from the warrants.

 

 

I liked the common too until Moynihan made it clear the majority of LAS cost wind down would occur in 2013. With that, the probability of share price appreciation earlier that 2019 increases, and makes the warrants much more attractive. For this reason, I added warrants about a month ago.

I hold these in a US taxable account. Question for tax experts: Doesn't the warrants' anti-dilution feature basically convert dividend income into capital gains? And wouldn't the warrants be incrementally preferable if Washington moves on setting dividend tax rates significantly higher than capital gains tax rates?

 

[Grenville]

So the roughly $2/share in earnings also jives with their overview on normalized PTPP analysis. 

 

But my question for the board is, if BAC trades at a 10x multiple, that's a $20 share price, then why the interest in the warrants? 

 

With the stock trading at $9.12 and the A warrant at $3.80, I calculate a break-even stock price of about $23. So if the stock trades above $23 in the next six years, the warrants will have better returns than the stock. If the current IV is close to $20, it is not a stretch to think that the IV in six years could be around $30 and that the stock could trade somewhere near IV in the next six years.

 

Nevertheless, I prefer the stock to the warrants. If the stock goes to $23 in the next six years, the annual return will be at least 17%. I will sleep better sticking with a comparatively safe 17%, so I'll forgo the potentially higher return from the warrants.

 

 

I liked the common too until Moynihan made it clear the majority of LAS cost wind down would occur in 2013. With that, the probability of share price appreciation earlier that 2019 increases, and makes the warrants much more attractive. For this reason, I added warrants about a month ago.

I hold these in a US taxable account. Question for tax experts: Doesn't the warrants' anti-dilution feature basically convert dividend income into capital gains? And wouldn't the warrants be incrementally preferable if Washington moves on setting dividend tax rates significantly higher than capital gains tax rates?

 

I'd read the prospectus, it has a section on the tax implications. I would be careful in a taxable account with the warrants because an adjustment for strike or share number might be classified as a taxable event even though you're not exercising them.

[redskin]

Thank you.  I thought I remembered hearing this.  Of course I would prefer 100% share buybacks under tangible book.  70% is a start.

 

This is a pretty clear answer on capital allocation from the Bernstein Strategic Decisions Conference, 5/30/12. (The call was mentioned on page #78 of this thread for reference, I took this from the transcript on Bloomberg, but the translation is not perfect.)

 

John Eamon McDonald

And when you do get back to returning capital, how will you think about buybacks versus dividends? Do you feel some obligation to give some of those shares back?

 

Brian T. Moynihan

I think that we've been saying for a while now and it's sort of similar to what the Fed, I think the recurring dividend issue is that – I think we talk about paying 30% of earnings as we earn them is the thought process. And now all the rest of it there is for there to be returned either as a special dividend or a stock buyback and, at our discount, [ph] to tangible book the stock would be the way to go in the near term (41:09). And so but we didn't – but the – [ph] you got to start from principals (41:13). We do not need capital to grow the core businesses in the company. And you'd say, well, how does that happen? And the reality is if you think about the run-off portfolio being replaced by core assets, that's $70 billion. It's a 10% to 15% growth on the core loan portfolio that will be coming off at the same time we're putting it on. And if I have stress on that, that would be a good thing with the right credit quality. And you should say then, that's terrific, Brian, keeps more capital. So you really don't have a need to sort of grow the balance sheet size-wise to grow the earnings because you still have the run-off portfolio. You have certain assets in the trading book that will run-off and provide some capital lift in all of those types of things.

 

So really every dollar we earn will be – will create more than a dollar of capital because of DTA and will be free because we don't need to grow the balance sheet to grow the businesses. And so the question is – think of a 30% payout ratio when we get approval, when we earn it. And then the rest have a dialog and most investors say, at this price, buy it and then if we have the – a champagne problem that we're above tangible book and things like that, then we can talk about what the best use is. But I've heard nobody say not to use it to buy the stock until you hit the tangible book.

[ERICOPOLY]

Why are the analysts consistently ignoring what Moynihan says and just making up stuff out of thin air?

 

[xazp]

He said it in the 2011 investor day presentation. 

 

I don't think it's relevant right now though.  In the short term I don't think they're going to retain earnings and, hopefully they will weight towards buybacks over dividends. 

 

Where did you see Moynihan mention 1/3 buybacks, 1/3 dividends, 1/3 retained?  I don't recall reading/hearing this.

So if you pay $9 for the stock, that's a 14.8% payout growing at 5% per annum if you use his projection of 1/3 of earnings is retained and we get a 15% return on tangible equity.

 

The "payout" I mention is not a dividend yield -- it's the combination of dividends and buybacks (you can choose to sell an offsetting amount of shares to their buyback in order to get a cash payout).

[hyten1]

so eric essentially due to the spread btw A and B (meaning since B expires early and has a higher price, it tend to move up slower and move down faster than A?)

 

you can take your money off table by shorting B at the same time still be able to take advantage of the up side?

 

how to you come to grip what your gains and losses will be if you do this? since i don't have a grasp of how much A or B will move up if BAC is at X price by Y date?

 

hy

 

 

But my question for the board is, if BAC trades at a 10x multiple, that's a $20 share price, then why the interest in the warrants? 

 

I'm not sure what the class B warrants would trade at if the stock were at $20 in a year or two, but let's optimistically say it will trade at $3.00 for simplicity.

 

A person buys the A warrant today for $3.80 and then in a year or two shorts the B warrant to recover $3.  That leaves only 80 cents on the table yet still room for incredible upside, considering the A warrants in the end might have a final strike of $10 and adjust to maybe 1.2x shares.

 

So, that might be effectively a $10 strike 2019 call priced at $3 that can be monetized in 2019 for $20, only you can extract perhaps 79% of your cost basis in a year or two if it runs to $20.

 

That's how I view the A warrants.

[ERICOPOLY]

so eric essentially due to the spread btw A and B (meaning since B expires early and has a higher price, it tend to move up slower and move down faster than A?)

 

you can take your money off table by shorting B at the same time still be able to take advantage of the up side?

 

how to you come to grip what your gains and losses will be if you do this? since i don't have a grasp of how much A or B will move up if BAC is at X price by Y date?

 

hy

 

 

I just wanted to point out that while these things might look very risky to some if held to maturity (due to perhaps a financial crisis or world war or whatever near maturity in 2019), they have an advantage in that they decay slowly and if we get some kind of a run to $20 when "the space station is fully operational" and they blast Dantooine" (pay a full dividend), there is a way that I outlined of getting most of your initial money out.  So you can dance and chew gum at the same time.

 

And you would tend to think that if the stock were trading at $20 right now, what would the $25 strike call trade for?  Once the discount in the stock is fully lifted and you still have years to warrant maturity, perhaps you write covered calls (given the leverage the covered call premium ought to be a fairly robust % of your initial outlay).

 

Anyhow, I haven't talked to my broker about how the margin works on the warrants.  Will shorting the B warrant eat into my margin capacity or will it be considered to be "covered" by the A warrant.

 

EDIT:  Apologies, I sort of didn't understand your questions fully so I repeated myself in different wording to see if that would work.

[racemize]

So the roughly $2/share in earnings also jives with their overview on normalized PTPP analysis. 

 

But my question for the board is, if BAC trades at a 10x multiple, that's a $20 share price, then why the interest in the warrants? 

 

We only need 2-3 more dollars with no adjustment for dividends/buybacks for it to work out better than common, and even at $20 you still do quite well, though not quite as good as common.  Also, that's assuming no growth up to 2019, so it shouldn't be too hard to get more than $2 EPS.  Also, isn't $2 on the low side if we are expecting more normal ROA/ROE (e.g., similar to WFC, which is trading well over book value)?  If we get to WFC valuations, that's $25+ per share without any change in current equity. 

 

Also, I think most of us have a basket of common/warrants with a leaning to common, so the warrants are for the big upside.

[ERICOPOLY]

So the roughly $2/share in earnings also jives with their overview on normalized PTPP analysis. 

 

But my question for the board is, if BAC trades at a 10x multiple, that's a $20 share price, then why the interest in the warrants? 

 

We only need 2-3 more dollars with no adjustment for dividends/buybacks for it to work out better than common, and even at $20 you still do quite well, though not quite as good as common.  Also, that's assuming no growth up to 2019, so it shouldn't be too hard to get more than $2 EPS.  Also, isn't $2 on the low side if we are expecting more normal ROA/ROE (e.g., similar to WFC, which is trading well over book value)?  If we get to WFC valuations, that's $25+ per share without any change in current equity. 

 

Also, I think most of us have a basket of common/warrants with a leaning to common, so the warrants are for the big upside.

 

$2 a year average capital return.

6 years  x $2 = $12

$20+$12 = $32

$32 - $13.3 = $18.7

$18.7 / $3.80 = 4.92x

 

Thus, warrants are a 5 "bagger" (I hate that term btw) assuming a $2 a year average capital return and a no growth business spitting out $2 a year that's valued at 10x earnings or $20 stock price.

 

Common stock under that sceario is only a 3.55x return.

 

In short,

4.92x vs 3.55x

 

38.5% more money at the end of the period given those assumptions.

[ERICOPOLY]

Also, any sub-$2 weak capital return over the first year or two or three won't really matter at all because the stock price is likely to be weak as a result.  All that matters is that they get the earning machine all oiled and ready for the warrant expiration so the stock can trade based on full earnings value.

 

Mathematically if you return $1.50 and plow it all into buybacks at $15, that's just as good as if you'd returned $2 and plowed it all into buybacks at $20.

 

And look at the share price today  :)

 

Shoot, they could return $1 next year and as long as the stock just hangs around $10 we still hit our $2 a year average number.

 

With the warrants, the dividends are effectively reinvested in the stock the same as a buyback (the share conversion adjustment) -- so the economics on the warrant value are exactly the same whether they pay a dividend or buy back shares.

[yitech]

True.. Warrant has similar return... slightly lower in pessimistic scenarios, but higher in optimistic scenarios than when purchased with 50% margin minus interest. Though the inherent leverage built-in in warrant is non-recourse versus margin debt.

[ERICOPOLY]

I'm not sure about the taxation of the warrant, but if the dividend strike adjustment isn't taxed then... it would be a common thing for companies to warrants to it's shareholders as a means of giving shareholders a tax shelter.

 

So therefore the dividend/strike adjustment must be taxed -- common sense.  However by common sense the share conversion adjustment would not be taxed.

 

That's just my applying logic to it -- I haven't checked the tax law.

[ERICOPOLY]

The way the warrant gets to 7x value is to keep my calculation but instead of a $20 terminal value, make it a $27 terminal value.

 

You get a $27 terminal value if the interest rate environment normalizes by warrant expiry to produce an additional $10b of revenue. 

 

But then if that were to happen a little earlier on, we could have in excess of $2 a year capital returns.

 

And needless to say it would be a nearly 20% return on tangible equity, so it would be trading higher than a 10x P/E.

 

Let's say a 12x P/E -- then it's an 8 bagger at this point.

 

But wait there's more... aren't they going to cut corporate taxes to 28% by then  ;D ?

 

(okay, maybe adding 70 cents a share for interest environment improvement is aggressive.  what should it be?)

[CONeal]

I'm not sure about the taxation of the warrant, but if the dividend strike adjustment isn't taxed then... it would be a common thing for companies to warrants to it's shareholders as a means of giving shareholders a tax shelter.

 

So therefore the dividend/strike adjustment must be taxed -- common sense.  However by common sense the share conversion adjustment would not be taxed.

 

That's just my applying logic to it -- I haven't checked the tax law.

 

Regarding warrants why would it be taxed? its not something that can be used as cash.  I'm thinking about the following secererio

 

A Warrants strike $13

Dividends taxable until 2019 $3

 

Adjusted strike price $10

Common price in 2019 $9

 

The warrants expire worthless but you still paid taxes on $3 that you never was able to put in your pocket.  To me it seems like they would be taxing you for Monopoly money. The only way it turns into hard cash is if the warrents are in the money when the conversion is done.  But that is not a taxable event in my view b/c your not selling anything, you buying the shares for a set price.  The only taxable even would be when you sell the actual shares.

 

Am I off the reservation with this line of thinking??? 

[xazp]

I'm not 100% sure but I think you're essentially betting that BAC will become one of the top market cap companies in the world.  More than Microsoft, Walmart, GE, Berkshire, Google, etc.  A $300Bn market cap would put BAC at #3 in the world today, behind only Apple and Exxon.  Up there, I think P/E's compress, margins compress, simply because at that size it is difficult to grow.  Everyone starts gunning for ya, litigators, competitors, regulators, politicians...

 

This isn't to say it won't happen.  I will be pleased if it does, for both my sake and yours, it's just that I'm not convinced this is the likely outcome.  If that were the likely outcome, why doesn't Buffett stick a few billion more into BAC?  AFAIK he has not bought any on the open market.  (I know they held BAC in the past but that was Simpson, not Buffett).  He continues to buy IBM, WFC, etc. 

 

So the roughly $2/share in earnings also jives with their overview on normalized PTPP analysis. 

 

But my question for the board is, if BAC trades at a 10x multiple, that's a $20 share price, then why the interest in the warrants? 

 

We only need 2-3 more dollars with no adjustment for dividends/buybacks for it to work out better than common, and even at $20 you still do quite well, though not quite as good as common.  Also, that's assuming no growth up to 2019, so it shouldn't be too hard to get more than $2 EPS.  Also, isn't $2 on the low side if we are expecting more normal ROA/ROE (e.g., similar to WFC, which is trading well over book value)?  If we get to WFC valuations, that's $25+ per share without any change in current equity. 

 

Also, I think most of us have a basket of common/warrants with a leaning to common, so the warrants are for the big upside.

 

$2 a year average capital return.

6 years  x $2 = $12

$20+$12 = $32

$32 - $13.3 = $18.7

$18.7 / $3.80 = 4.92x

 

Thus, warrants are a 5 "bagger" (I hate that term btw) assuming a $2 a year average capital return and a no growth business spitting out $2 a year that's valued at 10x earnings or $20 stock price.

 

Common stock under that sceario is only a 3.55x return.

 

In short,

4.92x vs 3.55x

 

38.5% more money at the end of the period given those assumptions.

[ERICOPOLY]

I'm not sure about the taxation of the warrant, but if the dividend strike adjustment isn't taxed then... it would be a common thing for companies to warrants to it's shareholders as a means of giving shareholders a tax shelter.

 

So therefore the dividend/strike adjustment must be taxed -- common sense.  However by common sense the share conversion adjustment would not be taxed.

 

That's just my applying logic to it -- I haven't checked the tax law.

 

Regarding warrants why would it be taxed? its not something that can be used as cash.  I'm thinking about the following secererio

 

A Warrants strike $13

Dividends taxable until 2019 $3

 

Adjusted strike price $10

Common price in 2019 $9

 

The warrants expire worthless but you still paid taxes on $3 that you never was able to put in your pocket.  To me it seems like they would be taxing you for Monopoly money. The only way it turns into hard cash is if the warrents are in the money when the conversion is done.  But that is not a taxable event in my view b/c your not selling anything, you buying the shares for a set price.  The only taxable even would be when you sell the actual shares.

 

Am I off the reservation with this line of thinking???

 

 

I don't know how the taxation works, but why aren't more companies issuing warrants to their shareholders as a tax management tool if they can indeed launder the dividends so effectively into capital gains?