Chrysler

Case VI: Chrysler's Warrants

1. Value the Chrysler Warrants held by the government on five dates:

(i) September 14, 1979 (case Exhibit 5 gives stock return volatility calculation).

(ii) January 7, 1980 (See Exhibit 6 for stock return volatility calculation).

(iii) April 8, 1980 (See Exhibit 7 for stock return volatility calculation).

(iv) May 12, 1980 (See Exhibit 8 for stock return volatility calculation).

(v) September 1, 1983 (See Exhibit 4 for stock return volatility calculation).

What explains the change in warrant value over these dates?

Note: In conducting the above calculation you need to:

(a)Use the yield on a T-bond (computed as of the date you are valuing the warrant) with maturity equal to the length of the relevant warrant as the risk-free rate in your calculations. (b) For each date, give three different warrant values: Warrant value without adjusting for dilution (i.e, value of an equivalent call option on the firm); warrant value after adjusting for the dilution caused by the exercise of the warrants held by the government alone (but not by the banks); warrant value after adjusting for the dilution caused by the exercise of the warrants held by both the government and the banks. (c) You need not adjust the stock price for the infusion of cash into the firm due to warrant exercise (i.e., no need for doing any iteration; in other words, you can assume S = [pic] in the warrant computation). (d) In doing this case, you can assume throughout that the number of shares outstanding in Chrysler was 68.5 million (as mentioned in the case at the bottom of page 2 of the case). In other words, for simplicity, I want you to ignore the information given in the case about new shares being sold in the firm during the summer of 1983.

2. Make use of the value of Chrysler's publicly traded warrants on September 1, 1983 (Exhibit 10) to compute the implied volatility of the underlying stock (a rough estimate based on trial-and-error will do). Compare...