Fannie Mae (FNMA)

[Fully Diluted]

Hi Donotunderstand,

I'll go over my calculation again in detail:
To determine the company value, one usually looks at the profits and multiplies the annual profit by the P/E ratio.
Fannie Mae's last annual profit was 13.2 billion dollars.
I chose 15.15 as the P/E, which gives Fannie a value of 200 billion dollars. Here you can see that the average P/E in the same industry in January 2018 was 22.2. So my calculation with a P/E of 15.15 is rather low and the value of the company would be higher if I had chosen 22.2, namely 293 billion dollars:
https://www.investopedia.com/ask/answers/051415/what-average-pricetoearnings-ratio-insurance-sector.asp

In any case, Fannie Mae is worth 200 billion dollars if she is recapitalized and the expected profits remain the same.

The second number of my calculation concerns the capital requirements that Fannie must meet in order to be recapitalized. I have chosen 110 billion dollars because the FHFA's proposal results in this value.

In order to calculate Fannie's PPS, you need to know how many shares there are. That's 1,158 billion shares. If the government exercises its warrant on 79.9% of the outstanding shares, then the Treasury will hold 4.6 billion shares. Together that makes 5.76 billion shares.

These 1,158 billion shares thus own a company with a value of at least 200 billion dollars.
PPS = 200 / 1,158 = $172.71
If the warrant is exercised:
PPS = 200 / 5.76 = $34.72

However, these numbers do not reflect the fact that Fannie still needs $110 billion to reach the company value with which we calcuate.
Therefore, this sum is subtracted from the value of the company before calculating the PPS.
200 - 110 = 90 billion dollars
PPS = 90 / 1,158 = $77.72
If the warrant is exercised:
PPS = 90 / 5.76 = $15.63

In addition, there is JPS worth 19.1 billion dollars. This figure must also be deducted from the company value to determine the correct value of the common shares:
90 - 19.1 = 70.9 billion dollars
This is the combined value of all common shares reflecting JPS and capital requirements.
PPS = 70.9 / 1,158 = $61.23
If the warrant is exercised:
PPS = 70.9 / 5.76 = $12.31

If the capital restoration plan provides for a two-year period, the capital requirement of $110 billion is reduced by the retained earnings of these two years. 2 x 13.2 = 26.4B
110 - 26.4 = 83.6

In this case only 83.6 billion dollars have to be raised by issuing new shares. But what price should these shares have when they are issued? Do you do that the way you want?
No! The value of the shares for the capital raise can be calculated exactly:
We have already determined a comparatively low company value of 200 billion dollars. And the remaining capital requirements of 83.6 billion dollars for Fannie Mae. We also consider the JPS worth 19.1 billion dollars. The value per common share can be calculated from this:
200 - 83.6 - 19.1 = 97.3

All outstanding shares have a value of 97.3 billion dollars.
PPS = 97.3 / 1.158 = $84.02
If the warrant is exercised:
PPS = 97.3 / 5.76 = $16.89

$16.89 is both the PPS and the issue price of the new shares in a capital raise.

How many shares must be issued to meet the $83.6 billion capital requirement?
83.6B / 16.89 = 4.95B new shares

Thus, in this example 4.95B + 5.76 = 10.71B shares would exist including the exercised warrant. Value per share: $16.89
All shares would have the following value:
10.71B x $16.89 = $180.9

If you now add the value of the JPS in the amount of 19.1 billion dollars, you get exactly the initial value of the company as I calculated it before:
$180.9B + $19.1B = $200B

It's easy to see that the bill is paying off. Our shares would have a value of $16.89 taking into account the JPS and the warrant exercised. Also included are earnings for the next two years. This is how Trump could implement it during his term in office.

If Calabria were to reduce Fannie Mae's footprint by 20%, the value of our shares would fall by almost the same percentage. The same for 30%, and so on. This is because the capital requirements would also be lower.

A capital raise is connected with expenses. This could reduce the PPS by about 5%.

This example shows that in principle it is hardly worth mentioning whether one converts the JPS into common shares at the SPO price of $16.89 or not.