Mr Cooper Group Inc (COOP)

[distrojunky]

When a warrant is exercised, there is a capital gain for the difference between the issue price and current price.

Example:

shares: 30,700,000
warrant Price: 1.32
Exercise Price: 2.50
Taxable gain: $36,226,000
shares: 30,700,000
warrant Price: 1.43
Exercise Price: 3.50 <-----
Taxable gain: $63,549,000
2014/2015 Taxable Income (no basis): $99,775,000
(taxed as ordinary income rate in tax year exercised)

Alternative:
shares: 30,700,000
warrant Price: 1.32
Exercise Price: 2.50
Taxable gain: $36,226,000
shares: 30,700,000
warrant Price: 1.43
Exercise Price: 1.70 <------
Taxable gain: $8,289,000
2014/2015 Taxable Income (no basis): $44,515,000

Difference $55,260,000

This shows why it's better for KKR to exercise near strike price. Note that if the pps goes to $25 after exercise, KKR's taxable income if they sell would be:

(25.00 - 2.50) * 30,700,000 +
(25.00 - 3.50) * 30,700,000 = 1,350,800,000

Alternative:

(25.00 - 2.50) * 30,700,000 + 690750000
(25.00 - 1.70) * 30,700,000 = 1,406,060,000