Equity Value to Value Per Share with Warrants
I'm having a complete mental block right now (probably since I've been starting at this stupid model too long). Let's say I've got a company with an enterprise value of $20k, equity value of $10k, 1000 shares outstanding, and 500 warrants. How do I apportion the $10k of value between the warrants and the shares outstanding?
Traditionally, I've used the black-scholes method for valuing the warrants, but that was always when the PPS was known. In this case I only know the equity value.
I suppose I should add that this is a private company and there is no "market value" of the warrants. So I can't even measure it that way.
Fairly simple
You need to estimate value for these 500 warrants (lets assume it is 2000) for this example.
You then subtract this 2,000 from 10,000 giving you a residual equity value of 8,000.
Divide this by your NOSH and you have your implied share price (8,000/1,000) - 8 per share
In essence, what you need to remember is that your equity value is what it is (assuming you have done a DCF on the business or a multiple valuation).
The exercise of warrants will merely dilute the existing shareholders, transferring value from their shares to the newly created shares issued on the exercise of warrants.
Hope this helps - if not!
Try this Damodaran has a good presentation on this subject http://people.stern.nyu.edu/adamodar/pdfiles/eqshare.pdf
When researching this, I read through damodaran's example. In his example though, he uses the value of the warrants based on the market price of the warrants.
In this case, I don't have an observable market price. Any option pricing model I would use requires a spot price (the strike and others won't fluctuate). So if I use basic shares outstanding, the PPS is $10, which would overstate the value of the warrants (and understate residual equity), and if I use fully-diluted, the PPS is $6.67, which would understate the value of the warrants (and overstate residual equity)
There is probably a stabilizing level, since it results in a circular reference. However, without an observable market price for the options, and an observable market price for the equity, I'm uncertain how to back into the value.
I don't think it's really necessary to use black-scholes (or any other option pricing model) here because you're not trying to price the options, you're trying to allocate the equity value to the shares. Basically you just need an "if" statement: If the fully-diluted equity value/fully diluted share count>strike on the warrants, the shares will be called, and the value/share is fully-diluted equity value/fully diluted share count. Otherwise, the warrants won't be exercised and the value is allocated only to the outstanding shares.
I sort of agree with Kenny, though, the final answer depends on one important piece of information which you have not mentioned.
Primarily that what terms have the warrants been issued on as the assumptions for that will underpin your calculation of allocation of equity value.
Sounds like without a market price of warrants you'd have to make a educated assumption about the market price? Can comp analysis work for warrants? or are they drastically different for each company?
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