My post on AIG contained some sloppy mathematical errors with respect to the return of the warrants and the common stock (now corrected). To make it up to you I decided to make a nice visualization of how the return profile differs, based on today’s market prices, between the warrants and the stock. Graphed is the total return over nine years at book value growth rates between 0 and 10%, and a book value discount between 50% and 0%. Note that the scale on the y-axis and the color intervals are not identical!
Also notice how the warrants only become a better investment if you can count on a shrinking discount to book. The most interesting part of the graphs are the values that are on the diagonal between the bottom left and the top right. Low growth rates will presumable go hand in hand with a big discount to book, while higher growth rates should result in a lower/no discount.
Wish I could add the two surfaces together so it would be visible how they exactly intersect, but think that’s unfortunately not possible with Excel, or is it?