Freddie Mac 2015 Annual Report Download - page 278

Financial Statements Notes to the Consolidated Financial Statements | Note 10
Freddie Mac 2015 Form 10-K 276
The warrant may be exercised in whole or in part at any time on or before September 7, 2028, by delivery
to us of a notice of exercise, payment of the exercise price of $0.00001 per share, and the warrant. If the
market price of one share of our common stock is greater than the exercise price, then, instead of paying
the exercise price, Treasury may elect to receive shares equal to the value of the warrant (or portion
thereof being canceled) pursuant to the formula specified in the warrant. Upon exercise of the warrant,
Treasury may assign the right to receive the shares of common stock issuable upon exercise to any other
person.
We account for the warrant in permanent equity. At issuance on September 7, 2008, we recognized the
warrant at fair value, and we do not recognize subsequent changes in fair value while the warrant
remains classified in equity. We recorded an aggregate fair value of $2.3 billion for the warrant as a
component of additional paid-in-capital. We derived the fair value of the warrant using a modified Black-
Scholes model. If the warrant is exercised, the stated value of the common stock issued will be
reclassified to common stock in our consolidated balance sheets. The warrant was determined to be in-
substance non-voting common stock, because the warrant’s exercise price of $0.00001 per share is
considered non-substantive (compared to the market price of our common stock). As a result, the shares
associated with the warrant are included in the computation of basic and diluted earnings (loss) per
share. The weighted average shares of common stock outstanding for the years ended December 31,
2015, 2014, and 2013, respectively, included shares of common stock that would be issuable upon full
exercise of the warrant issued to Treasury.
PREFERRED STOCK
We have the option to redeem our preferred stock on specified dates, at their redemption price plus
dividends accrued through the redemption date. However, without the consent of Treasury, we are
restricted from making payments to purchase or redeem preferred stock as well as paying any preferred
dividends, other than dividends on the senior preferred stock. All 24 classes of preferred stock are
perpetual and non-cumulative, and carry no significant voting rights or rights to purchase additional
Freddie Mac stock or securities. Costs incurred in connection with the issuance of preferred stock are
charged to additional paid-in capital.