Mohnish Pabrai Boston College Presentation

[ERICOPOLY]

Yes, but what I'm trying to adjust for, is in say 3-4 years when the shares per warrant has changed for WFC (e.g., from 1 -> 1.1).

 

You just agreed (above) that it doesn't matter to the banker what you invest the money in that you borrowed.  You only owe him interest on the money borrowed.

[racemize]

Yes, but what I'm trying to adjust for, is in say 3-4 years when the shares per warrant has changed for WFC (e.g., from 1 -> 1.1).

 

You just agreed (above) that it doesn't matter to the banker what you invest the money in that you borrowed.  You only owe him interest on the money borrowed.

 

I believe that adjustments after the fact will affect the economics of the amount you are borrowing, if you are looking at purchasing after the adjustments (not before).

 

e.g., if I change the shares per warrant from 1 to 1.2, then the total returns change.  Thus, ignoring that modification from 1->1.2 does not give accurate results, I believe.

 

Or said another way, the intersection point has to change if I can buy 1.2 shares instead of 1 shares.

[racemize]

Ok, so hypothetical:

 

It is 2016 and WFC has paid enough dividends to get shares per warrant to 1.1.

 

Let's say current numbers are:

Stock price: 60

current div: 0.45 per quarter

div threshold: 0.34

shares per warrant: 1.1

warrant strike: adjusted down to $30 from 34.01

warrant cost: $32

 

Are you saying I can ignore the fact that it is 1.1 shares per warrant to calculate the new cost of leverage?

[ERICOPOLY]

Ok, so hypothetical:

 

It is 2016 and WFC has paid enough dividends to get shares per warrant to 1.1.

 

Let's say current numbers are:

Stock price: 60

current div: 0.45 per quarter

div threshold: 0.34

shares per warrant: 1.1

warrant strike: adjusted down to $30 from 34.01

warrant cost: $32

 

Are you saying I can ignore the fact that it is 1.1 shares per warrant to calculate the new cost of leverage?

 

 

I am saying that if you run the equation today on the WFC warrant, it will spit out the correct answer because it doesn't matter if you give your dividends to the Pope, or if you reinvest them into the stock.

 

All the share conversion adjustment does is give credit to the fact that you've reinvested it into the stock rather than having given it to the Pope.

 

So ignore it.

[racemize]

Yes, but I'm not asking about today.  I'm asking how do I calculate the cost of leverage in 2016, at that point?

[racemize]

Apparently, I gave myself too good a price.  Let me retry:

 

Let's say we are one year from expiry:

WFC = 60

WFC-WT = 35

strike = 30

warrants per share = 1.1

dividend thresh = 0.34

current div = .45

 

[ERICOPOLY]

Yes, but I'm not asking about today.  I'm asking how do I calculate the cost of leverage in 2016, at that point?

 

Ahh... sorry.

 

Well, like I said, I hate working in fractions.  So I would just divide the warrant premium by the number of shares.  Then that would give me the per-share premium.

 

So if the premium were 40 50 cents and it was converting to 1.25x shares, then I guess that would be a 30 40 cent premium per share.  Then you use the formula plugging in 30   40 cents for the option premium, and whatever the new strike price is at that point.

 

EDIT:  Fixed the numbers

[racemize]

yes, that's my only current thought as well.  I'll have to do a lot of verifications to confirm it.  The WFC example I just gave will be a starting point I think.

[smd123]

This article did a nice comparative analysis on returns, using similar logic: http://seekingalpha.com/article/2574295-performance-at-expiry-of-financial-crisis-era-warrants-vs-common-stock-comparative-analysis