On Aug. 25, 2011, Bank of America (BAC) announced the sale of $5 billion of 6% Cumulative Perpetual Preferred Stock to Berkshire Hathaway (BRK.A)(BRK.B). The preferred stock is redeemable by Bank of America at any time at a 5 percent premium.
In conjunction with this agreement, Berkshire also received warrants to purchase 700,000,000 shares of Bank of America common stock at an exercise price of $7.14 per share. The warrants may be exercised in whole or in part at any time, and from time to time, during their 10-year life.
At Bank of America’s closing price of $6.87 per share on Jan. 11, 2012, what are these warrants worth? Although these warrants are currently “out of the money” since the underlying common shares are selling below the strike price of $7.14, they have considerable value which can be estimated using a Black-Scholes calculator.