Question

Bonds with Detachable Warrants:

Langdon & co. issues bonds with a face value of $50,000 for $51000. each $1000 bond carries 10 warrants, and each warrant allows the holder to acquire one share of $1 par common stock for $40 per share. immediately after the issuance, the bonds are quoted at 99 ex rights and the warrants are quoted at $5 each. Calculate the value to be assigned to the bonds and to the warrants.

value assigned to bonds

value assigned to warrants

Answer 1

Solution:

Value assigned to bonds = $ 48,548.08

Value assigned to warrants = $ 2,451.92

Allocation:	Bonds	Warrants
Issue Price(Given)	$             51,000	$                            51,000
Allocation %(Note:1)	95.19%	4.81%
Value Assigned	$             48,548.08	$                              2,451.92

Note:

1) Calculation of Percentage of Assign.

	No.Of Units(a)	Warrants per Bond(b)	Total Units(c=a*b)	Market price per unit(d)	Total (c*d)	Percent%
Bonds	50		50	$                                       990	$         49,500	95.19%
Warrants	50	10	500	$                                            5	$            2,500	4.81%
Total Fair Market Value					$         52,000	100%

2) Proportional Method has been used for calculating the percentage to assign.