CWI is considering whether to raise $1 billion by issuing a unit consisting of $1 billion- 7.5%-10 year subordinated debentures ($1,000 face value each) and 14.71 detachable warrants, each entitling the holder to purchase a share of CWI for $68 payable in cash or by surrendering the bonds. The warrants would expire in 5 years. Alternatively, CWI is able to issue $500 million of straight subordinated debentures at par with a 13.25% coupon. Issue fees would be 0.75% of principal amount in each case. The following information is available to CWI:
Yield on a 5 year government note 11.4%
CWI stock price $47
CWI stock returns volatility 54%
CWI common shares outstanding 117.2 million
a) What price would the 7.5% debentures trade for without the warrants?
b) What is the value of the warrants?