omadFNCE 726 – Advanced Corporate Finance
Case #7 Chrysler’s Warrants Case
Brian Davis, Himanshu Nagpal, Neill Butcher, Ryan Nelson, Sebastian Mancel
1.) What is the rationale behind the government bail-out? Why is bail-out a better alternative than Chapter 11 bankruptcy?
As discussed in the footnotes of the case, we know that the negative impact on the federal budget would be greater than the cost of assistance due to unemployment benefits, social programs, and reduced tax revenues. Additionally, a bankruptcy would disproportionately affect an entire region. Failure would also most likely lead to greater monopoly power of the remaining firms.
2.) Value Chrysler’s warrants on four different dates: September 14 1979, January 7 1980, April 8, 1980 and May 12 1980. Why does the value of the warrants change over time?
The value of the Chrysler warrants were estimated for the four dates based on the prior 30-day volatility of returns and a riskless rate using the 90-day T-Bill (see table below). In addition to these two factors, the value of the warrants change based on the stock price and the maturity date. Because the maturity dates are very similar, this factor had little effect on the warrant value.
From September 1979 to January 1980, the increase in volatility was the primary driver in the increase in value over the period. By April 1980, the increasing riskless rate would have pushed up the value, but the sharp drop in stock price lowered it. We can see the effect of the riskless rate more clearly by comparing the value in January and May 1980, where a nearly 300 basis point rate decrease cut the value by about $0.20 per warrant.

By substituting the time in the warrants from Exhibit 10 into models above, we can recalculate the warrant values and compare them to the actual values given in the exhibit. As can be seen, the market is pricing