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.
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Hi John,
In this question we got information on a 9% 300,000 subordinated loan with warrants attached. the debt providers want 150 ordinary shares per 100 loan.
The warrant can be exercisable after 4 years so why does the answer use the 300,000 to determine the number of share when the company has been making payments, at the end of 4 years the loan balance will be 132,700 so 132,700/100*150=199050 shares instead they used the original loan amount why is this?
When there are warrants attached, the investors in the loan will get repaid and will also be entitled to exercise the warrants (the warrants are a ‘perk’ to persuade them to lend money in the first place).
When they first lent the money they will have been told the repayment terms but will also have been told how many warrants they have been given, which here is 100 shares for every $100 they lend.
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Alright so it is correct in determining shares they are owed based on the original amount borrowed which is 300,000 because this is the perk of lending at the start even if the company has been paying of the loan?
Hi John.
In d, how did they calculate 300000 and 450000 shares? Why that isn’t acceptable to managers?I assume that you mean part c, and the answer shows the workings!
Under the original suggestion the warrants give 100 share for every $100 nominal of loan. The loan is $300,000 and so they get 300,000 shares.
Under the revised suggestion they get 150 shares for every $100 loan, which means they get 450,000 shares for the $300,000 loan.It is the second that might not be acceptable to the managers because they would lose control – the venture capitalists would end up owning more than half of the total shares.
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