Estimate cost of capital for bond with warrants


A 20-year bond comes with 25 warrants attached. Each warrant has a strike price (also called an exercise price) of $15 and 10 years until expiration. Each warrant's value is estimated to be $8. The cost of debt for a 20-year annual payment bond without warrants is 8%. When exercised, each warrant will bring in an amount equal to the strike price, which is $20. The firm will receive cash when the warrants are exercised. What coupon rate must be set on the bond with warrants to make the total package sell for $1,000? How many shares of stock will be outstanding after the warrants are exercised (there are 30 million shares at Year 0). Estimate the Cost of Capital for the Bond with Warrants, rBwW. Also calculate the after-tax Cost of Bonds with Warrants (T = 30%).

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Finance Basics: Estimate cost of capital for bond with warrants
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