1. Genesis Inc. intends to issue $50 million in capital to fund new opportunities. If the firm decides to issue the new capital in the form of a straight debt 20-year bond offering, an 11% coupon would be required. An alternative would be to include 20 warrants per $1,000 bond attached to the bonds that would reduce the coupon to 9%. The firm has 8 million common shares outstanding with a current price of $22.50 per share. The warrants could be exercised in 10 years at an exercise price of $26.50 per share.
After issuing the bonds and the warrants, Genesis’ operations and operations are expected to grow at a constant rate of 9% per year. If investors are willing to pay $1,000 for each bond, what is the value of each warrant attached to the bond issue?
2. Refer to problem 6 above. What is the expected total value of Genesis’ Inc. in 10 years?