Problem:
Assume the firm's stock now sells for $30 per share. The company wants to raise $20 million by issuing 20-year, annual interest, $1,000 par value bonds. Each bond will have attached 40 warrants, each exercisable into 1 share of stock at an exercise price of $36. The firms straight bonds yield 8 percent. Each warrant is expected to have a market value of $.75 when the stock sells at $30. The company wants to establish a coupon interest rate and dollar coupon to ensure that the bonds will clear the market.
Required:
Question 1: Calculate the value of the debt portion of the bonds with warrants?
Question 2: Calculate the dollar coupon amount per bond with warrants?
Question 3: Calculate the coupon interest rate that should be set on the bonds with warrants?
Note: Please show the work not just the answer.