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The Intelligent Investor: The Definitive Book On Value part 44

The Intelligent Investor: The Definitive Book On Value part 44. The purpose of this book is to supply, in a form suitable for laymen, guidance in the adoption and execution of an investment policy. Comparatively little will be said here about the technique of analyzing securities; attention will be paid chiefly to investment principles and investors’ attitudes. We shall, however, provide a number of condensed comparisons of specific securities - chiefly in pairs appearing side by side in the New York Stock Exchange list in order to bring home in concrete fashion the important elements involved in specific choices of common stocks | 416 The Intelligent Investor TABLE 16-4 Calculation of True Market Price and Adjusted Price Earnings Ratio of a Common Stock with Large Amounts of Warrants Outstanding Example National General Corp. in June 1971 1. Calculation of True Market Price. Market value of 3 issues of warrants June 30 1971 94 000 000 Value of warrants per share of common stock 18.80 Price of common stock alone 24.50 Corrected price of common adjusted for warrants 43.30 2. Calculation of P E Ratio to Allow for Warrant Dilution 1970 earnings Before Warrant After Warrant Dilution Company s Our A. Before Special Items. Dilution Calculation Calculation Earned per share 2.33 1.60 2.33 Price of common 24.50 24.50 43.30 adj. P E ratio 10.5 X 15.3X 18.5X B. After Special Items. Earned per share .90 1.33 .90 Price of common 24.50 24.50 43.30 adj. P E ratio 27.2 X 18.4X 48.1 X Note that after special charges the effect of the company s calculation is to increase the earnings per share and reduce the P E ratio. This is manifestly absurd. By our suggested method the effect of the dilution is to increase the P E ratio substantially as it should be. equally well to one invention or another such as the following in Bayard Taylor s translation Faust Imagination in its highest flight Exerts itself but cannot grasp it quite. Mephistopheles the inventor If one needs coin the brokers ready stand. The Fool finally The magic paper . Convertible Issues and Warrants 417 Practical Postscript The crime of the warrants is in having been born. Once born they function as other security forms and offer chances of profit as well as of loss. Nearly all the newer warrants run for a limited time generally between five and ten years. The older warrants were often perpetual and they were likely to have fascinating price histories over the years. Example The record books will show that Tri-Continental Corp. warrants which date from 1929 sold at a negligible 1 32 of a dollar each in the depth of the depression. From that lowly .