Problem:
Question 1 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 40 warrants attached, each exercisable into 1 share of stock at an exercise price of $36. The firms straight bonds yield 8%. Each warrant is expected to have a market value of $0.75 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.
Calculate the value of the debt portion of the bonds with warrants.
Stock Price $30
Bonds-life and par value $20
Par Value $1000
# of warrants per bond 40
Exercise price 36
Warrant Market Value @ P=$30 0.75
Yield on Straight Bonds 8%
1. Calculate the dollar coupon amount per bond with warrants.
2. Calculate the coupon interest rate that should be set on the bonds with warrants.
3. Identify 2 or 3 advantages to the company of issuing a bond with warrants instead of straight bonds.
4. Identify 2 or 3 advantages to the investor of buying a bond with warrants instead of straight bonds.