1. How many new warrants will an investor be entitled to if he possessed 30,000 shares of Insas before the ex-date and he held the shares after the whole exercise?
New Warrant = 30,000/5 * 2 = 12,000
2. What is the fair value of the RPS, assuming you require a return of 5.5%, a premium of 1.6% above the 10-year MGS rate of 3.9% investing in this RPS?
Fair Value of RPS = Sum (PV of Interest) + PV of Face Value = 0.935
3. What is the fair value of Insas after the ex-date.
Adjusted Price, Pa = = (1.19 * 30000 + 0 * 30000 * 0 + 0.4 * 30000 * 1)/(30000 + 0 * 30000 + 30000 * 0 + 30000 * 0.4) = 1.136
4. What is the fair value of each warrant after the completion of the exercise?
Fair Value of Warrant = Pa - K = 1.136 - 1 = 0.135
5. What is the fair value of each renounceable Rights when it was trading during the one week duration after the ex-date but before the expiry of the exercise date?
Fair Value of Rights, R = Fair Value of Warrant = Pa - K = 1.136 - 1 = 0.135
6. Explain the rational if you think the values for 3, 4 and 5 computed is “fair” or not?
(3) I think the value is fair as the cum price have to be adjusted as the original shares have been divided to smaller pieces.
(4) The warrant might trade higher than 0.135 as it will have a lifespan of 5 years
(5) The rights might trade higher than 0.135 as it provide a chance for trader to perform leveraging.
!! Note: In actual case, nobody will forego the time value of warrants by conversion like that. The warrant price to be much higher than that, maybe 25 sen a share from option pricing and the price of Insas will be lower at the same amount of difference, such that the total value of the warrants and its underlying share remains approximately the same before and after the corporate exercise.
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