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Chryslers Warrants
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1. Value the Chrysler warrants held by the government on the following five dates:
a)!
"#$#%&%'$5.016
b) &#%()'$5.748
c)!(#%()'$4.070
d)P #*#%()'$6.256
e)!
"##%(+'$23.442

Table 1
Number of shares
Number of warrants
Risk-free rate
Time (t)
Stock Price
Adjusted Stock Price
Strike Price
Historic (30 day) Volatility
d1
d2
N(d1)
N(d2)
Call Value-Historic Volatility
Dilution factor
Warrant value-Historic Volatility
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Warrant value-Implied Volatility
Total warrant value-Historic
Total warrant value-Implied

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9/14/1979






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5.016
39.2%
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1/7/1980






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5.748
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4/8/1980
5/12/1980







 


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6.256
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9/1/1983






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23.442
134.4%
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2. Why did the warrants value change over this time?

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3. Value the governments loan guarantee as of May 12, 1980. Remember that it amounts to a put option, which allows the banks to
put their risky Chrysler loans to the government. Use the date in Exhibit 11 to estimate the volatility of returns on Chrysler debt.

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Table 2 (Method 1 Put Option)

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10-Year T-Bond rate at 5/12/1980 - closest date to bond issues
Assume that bonds mature on 1/1/1990
Assume that government guarantee is default-free, freezes price at 100%
Used in Black-Scholes formulas below
Assume that government fully guarantees the face value
=(0.002999*252)^0.5; daily deviation from Exhibit 11
=(LN(E7/E9)+E6*(E5-E8+(E10^2/2)))/(E10*E6^0.5)
=E11-E10*E6^0.5
=NORMSDIST(E11)
=NORMSDIST(E12)
=(EXP((0-E8)*E6))*E7*E13-E9*(EXP((0-E5)*E6))*E14
=E15-E7*EXP((-E8)*E6)+E9*(EXP((-E5)*E6))
=E17*400000000
=C17*500000000+D17*300000000+E17*400000000





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Table 3 (Method 2 Interest Savings)

Check of Interest Savings vs Put Valuation of Guarantee

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

Interest savings w/ $500M portion

$205,951,830


 

  

  

  

  

  

  

  

  

  

Interest savings w/ $300M portion

$110,093,406

  

  

  

  

  

  

  

  

  

  






 


  


  


  


  


  


  


  


  

Interest savings w/ $400M portion

Total interest savings
Less 10% prepayment risk
Versus: Total put value

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$84,247,696
$400,292,933
$360,263,640
$372,463,756

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$. What is the prospective internal rate of return to the government on the loan guarantee as of May 12, 1980, taking into account
the expected fees and current value of the warrants?

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Cost of Gurantee

372463756

Value of Warrant

90089256

Fee
Net CF
IRR

10,800,000
-282374500

10800000

10,800,000
10800000

10,800,000
10800000

10,800,000
10800000

10,800,000
10800000

10,800,000
10800000

10,800,000
10800000

10,800,000
10800000

10,800,000
10800000

10,800,000
10800000

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5. How does this IRR compare with Chryslergtype risk priced in the open market?

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6. What price should Chrysler bid for its warrants in September 1983?
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7. Based on your bid price, what was the IRR on the governments liability after the fact?
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8. Was government guarantee overpriced?

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