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Chrysler Case Essay

1584 words - 7 pages

(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 ...view middle of the document...

• Bad press image will also be avoided.
• Shareholders confidence with the company will be questioned because of its inability to bargain with the government
• The company forfeits its rights to claim what is rightfully theirs
• The company will be faced with a greater risk of claiming its warrants if it value will appreciate and the profitability weakens.
• It could leave the company open to a hostile takeover

2. Chrysler will continue to pay for annual interest of its outstanding debts until maturity before it can reclaim its warrants
• The company will be able to allocate its finances and service its long term liabilities without having to face resistance with government and other stakeholders.
• There will be assurance of claiming the warrants after the term has lapsed and all credit obligations have been paid.
• If Chrysler will be able to buy back stocks, the company could gain voting control.
• There will be no company takeover from other brands
• There will be waste of cash in paying interest instead of using it in operational expenditures to help the company.
• There is the probability that the company will face another downturn and will have no more assets to be used as security.

3. Chrysler to participate on the bidding and offer whatever price it takes to repurchase its stocks.
• The company will end its feud with the government and other third parties.
• The company will be able to regain all the assets that the government has liens and encumbrances
• The company might exhaust all its valuable cash reserves to get its warrants back and none will be left for capital and operational expenditures

V. Analysis & Solution

It is important to determine timeline values of Chrysler’s warrants held by the government to determine if the proposal of the company is relevant

1. First date of loan guarantee bill with equity kicker drawn up at treasury – Sept. 14, 1979: $5.016
2. President signs the loan guarantee bill with no equity kicker – January 7, 1980: $5.748
3. Chrysler and the Treasury negotiate, warrants proposed – April 8, 1980: $4.070
4. Government signs guarantee including warrants – May 12, 1980: $6.256
5. Date bids for the government’s Chrysler warrants were due – September 1, 1983: $23.442

Chrysler’s warrant value has changed over time primarily because of changes in the stock price. Other factors are changes in the estimate of volatility, risk free rate and time remaining on the warrant.
It is to determine the value of the government’s loan guarantee as of May 12, 1980 since it amounts to a put option, which allows the banks to put their risky Chrysler loans to the government. Exhibit 11 was used to estimate the volatility of returns on Chrysler debt.

Determining the value of loan guarantees using two methods:

1) Treating the guarantee as a put option.
Answer: $372.5MM

(Method 1 – Put Option)


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