Question

Warrants Maese Industries Inc. has warrants outstanding that permit the holders to purchase 1 share of stock per warrant at a price of $25. a. Calculate the exercise value of a warrant at each of the following common stock prices: (1) $20, (2) $25, (3) $30, (4) $100. (Hint: A warrant's exercise value is the difference between the stock price and the purchase price specified by the warrant if the warrant were to be exercised.) If your answer is zero, enter "O". Round your answers to the nearest dollar. 0 (1) $20 $ (2) $25 $ (3) $305 (4) $100 $ 75 b. Assume the firm's stock now sells for $20 per share. The company wants to sell some 20-year, $1,000 par value bonds with interest paid annually. Each bond will have attached 100 warrants, each exercisable into 1 share of stock at an exercise price of $25. The firm's straight bonds yield 9%. Assume that each warrant will have a market value of $3.5 when the stock sells at $20. What coupon interest rate must the company set on the bonds with warrants if they are to clear the market? (Hint: The convertible bond should have an initial price of $1,000.) Do not round Intermediate calculations. Round your answer to two decimal places. What dollar coupon must the company set on the bonds with warrants if they are to clear the market? (Hint: The convertible bond should have an initial price of $1,000.) Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

Value of warrants + value of bonds = $1000

Value of warrants:

No of warrants = 100 warrants

Market value = $3.5

Total value = $350

Value of bond:

n = 20 years

r = 9% per year

PVIF = 0.1784

PVIFA = 9.1285

Redemption value = $1000

PVIF * redemption value = $178.4

PVIFA *Interest payment per period =9.1285 * interest payment per period

$350 + $178.4 + 9.1285 * interest payment per period $1000

9.1285 * interest payment per period $1000 = $1000 -$350-$178.4

9.1285 * interest payment per period $1000 =$471.6

Interest payment for the period = $471.6/9.1285 = $51.66 = $52 (round off)

Annual dollar coupon interest = $52/$1000 = 5.2%

Company would set a coupon interest rate 5.2%, producing an annual interest payment = $52