Peter, I thank you for providing the text book wisdom from the cream of the academics. The reason they are not wealthier than they are is generally known. It seems that occasionally academic wisdom is different from the wisdom of the real world.
Can you borrow at the risk free interest rate in YOUR margin account?
Let's forget it is LGND for a moment. You buy something for $15.25. I buy something for $6.125 less, namely for $9.125. Two & a quarter years from now, I give what I bought for $9.125 PLUS $7.125 to a pharmaceutical company & they give me one share of their common stock.
What have I paid for that stock? Let's see. $9.125 plus $7.125 equals $16.25. If what you paid $15.25 for , 2 1/4 years ago, is also one share of stock in that pharmaceutical company, you have paid one dollar less for what I have paid $16.25 for.
Looks like you got the better deal because you paid only $15.25 for what I paid $16.25? Yes, if you don't believe that I derived any value from having $6.125 more to use over those 2 1/4 years than you did.
But, you could have borrowed $6.125 for 2 1/4 years in a margin account on your one share in the pharmaceutical company. What would that have cost you? The answer to that question can be supplied by looking at what your brokerage charges you each month for the use of borrowed money. I can confidently predict that the charge is more than "the risk free interest rate" the academics cavil about.
Your job now is to take that monthly charge , compound it, calculate the totality of monthly prices from now until 6/03/00 & also calculate and add in to the total margin interest cost a premium to reflect the probability that interest rates will or will not remain unchanged for the next 2 1/4 years.
Please report back promptly with your answer for the calculation & also whether you still believe the LGNDW are riskier than LGND or that they are a more expensive purchase than the purchase of LGND, when bought for $6.125 less than LGND is selling at.
Lastly, tell us what you think the value of losing $6.125 less than you would lose on the stock, should the stock go to zero, or $5.125 less should the stock only decline to $1.00, or $4.125 less should the stock decline only to $2.00. or $3,125 less should the stock decline only to $3.00 etc.
P.S. You also kindly mentioned that the scholars from acacdeme value the warrants currently at $9.55. I am suggesting their purchase at $9.125, when the stock is at $15.25, which it was at when you showed that they thought the warrants were worth $9.55. Didn't that give you pause before your suggestion that my analysis was incorrect or at best not worthy of being acted on? |
