Chysler Case

CHRYSLER’S WARRANTS: SEPTEMBER 1983

(Written Analysis of Case)

I. Statement of the Problem

With Chrysler’s rapid recovery, exceeding profit expectations and increasing negative market factor resiliency, is the request to return its warrants held by government at no cost valid and justifiable?

II. Objectives

1. Value the Chrysler warrants held by the government.

2. Determine the factors that affected the value of warrants over time.

3. Determine if the government’s guarantee is overpriced or underpriced.

4. Determine Chrysler’s bid price taking into account all the risks the government had run.

5. State a well-defined, reasonable, and accurate justification to support Chrysler’s claim.

III. Areas of Consideration

1. The government’s warrant of Chrysler saved the company from a financial tragedy.

2. The impact on the federal budget of a Chrysler failure would be greater than the cost of assistance.

3. A Chrysler failure would disproportionately affect a city and a region that already had substantial economic problems.

4. Failure of Chrysler would lead to either greater monopoly power by surviving US firms, or worsening balance of payments as foreign producers captured increase US market share.

5. In the long term forecast, Chrysler actually has an increasing demand.

6. Common Stock Warrants

7. Chrysler requested from the government to surrender the warrants at little or no cost.

8. Lee Iacocca, CEO of Chrysler, stated that the government’s money was never at risk in the first place when the warrants were issued.

IV. Alternative Courses of Action

1. Chrysler will no longer request for return of its warrants at no cost

Pros:

* The company will not anymore concern itself on reclaiming its warrants for the time being; instead it will focus on realigning with its existing strategies to increase market share and profitability.

* Cash will be used in more profitable activities

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