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The Value of Warren Buffett’s Bank of America Warrants – Depending on Your Calculator

A roughly 36% rise in Bank of America’s (BAC) share price has done little for the value of Berkshire Hathaway’s (BRK.A) warrants in the company, at least when figured by the standard method using a Black-Scholes calculator. Then again, no one in Warren Buffett’s inner circle believes in that calculator. Here's a BoA stock chart.

BAC Chart

BAC data by YCharts

One might recall that Berkshire acquired 10-year warrants for 700 million BofA shares when Buffett offered the crisis-ridden bank a $5 billion lifejacket last August. The options have a strike price of $7.14 on shares that were trading at $6.99 before the deal was struck.

The quite popular Black-Scholes calculator figures the value of warrants using current price, strike price, time until expiry, interest rate risk and share volatility as variables. Plugging in the data for these warrants spits out a current valuation of $5.63 per share, or $3.94 billion. That compares to $5.49 apiece, or $3.84 billion in total, the day after the deal was done.

Buffett and friends disdain this sort of mathematical standardization as just another Wall Street oversimplification. At the most recent annual meeting, Charles Munger called the use of a Black-Scholes calculator for valuing long-term options “a standardized solution (invented by accountants) that does not require them to think too hard.”

It’s not hard to see his point. Berkshire’s investment, which comes with a 6% dividend on cumulative preferred shares as well as the options, is widely regarded as Buffett’s biggest coup in decades. Simply exercising those warrants tomorrow and selling at or near the Oct. 18 closing price of $9.47 would create a $1.63 billion reward. At least, that’s what my kid’s third grade calculator says.

Dee Gill is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.

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