10.5  Example 2:  General Motors (GM)

At the time of the writing of this chapter, GM is not longer under the ticker GM, instead it is trading as “Motors Liquidation Ordinary Shares” and ticker MTLQQ.  On Dec 31 2008, it traded at $3.20 per share.

To get information about GM, in the information system, click “View Another Ticker:”

In the new window that appears, type in MTLQQ as the ticker, select filing tyoe 10-K, and add the ticker.  GM’s 10-K will appear:

The “Interactive Data” link is not available, so click on the 10-K document, scroll down to the table of contents and click on “Consolidated Balance Sheets”:

This leads you to the statement of assets and liabilities, and when we did this, the assets at the end of 2008 were 91.047m:

Scroll down further to see the liabilities at the end of 2008:

You can see the breakdown of liabilities, the total being 176.387m. 

The shares outstanding were 610 (all the amounts are in millions).  So we have the assets and the strike price of the option on a per-share basis: A = 149.26, F=285.16.

What should we use as the maturity of the option?  Technically, this is the first date at which a company fails to make a debt payment; that failure triggers default, and under the laws of many countries, the bond holders are then among the first in line to either receive the assets of the company or, as commonly happens, to agree to a restructuring.  But at that point, the stock is worthless. Let us calculate what the value of GM would be if all the debt was due in 6 months.

The 6 month Treasury bill yield at the time was 0.34%.

So that leaves the last input, asset volatility.  To start with, let’s try different volatility numbers and see how much difference they make.  We did the exercise repeatedly in Valuation Tutor to come up with the following:

You can see that with an asset volatility of 0.6512, the calculated value matches the market price:

So it is plausible that the stock could trade for $3.20.  Of course, we had to guess at the asset volatility to make it come out right, i.e. ask: what asset volatility makes the calculated value equal to the market price?   So you might be asking how useful this is.

It turns out you don’t have to guess.  You can calculate the asset volatility in another way, from the volatility of the stock return.  This volatility can be calculated from historical stock returns or as the implied volatility from options on the stock.