O'Brien Computers Inc. needs to rise $29 million to begin producing a new microcomputer. O'Bien nonconvertible debentures currently yield 14%. Its stock sells for $32 per share; the last dividend was $2.35; and the expected growth rate is a constant $10%. Investment bankers have tentatively proposed that O'Brien raise the $29 million by issuing convertible debentures. These convertibles would have a $1,200 par value, carry an annual coupon rate of 10%, have a 20-year maturity, and be convertible into 19 share of stock. The bonds would be noncallable for $5 per year in Year 6 and each year thereafter. Management has called convertibles in the past (and presumably will call them again in the future), once they were eligible for call, as soon as their conversion value was about 23% above their par value (not their call price).
Suppose the previously outlined projects work out on schedule for 2 years, but then O'Brien begins to experience extremely strong competition from Japanese firms. As a result, O'Brien's expected growth rate from 10% to zero. Assume that the dividend at the time of the drop is $2.84. The company's credit strength is not impaired, and its value of is also unchanged. What would happen (1) to the stock price and (2) to the convertible bond's price? Be as precise as you can. Round your answer to the nearest percent.
Percentage decline in stock price is X%.
Percentage decline of X% in the value of the convertible.
Srorm Software wants to issue $120 million ($1,200 x 100,000 bonds) in new capital to fund new opportunities. If Storm raised the $120 million of new capital in a straight-debt 20-year bond offering, Storm would have to offer an annual coupon rate of 12%. However, Storm's advisers have suggested a 20-year bond offering with warrants. According to the advisers, Storm could issue 8% annual coupon-bearing debt with 30 warrants per $1,200 face value bond. Storm has 10 million shares of stock outstanding at a current price of $20. The warrants can be exercised in 10 years (on December 31, 2025) at an exercise price of $25. Each warrant entitles its holder to buy one share of Storm Software stock. After issuing the bonds with warrants, Storm's operations and investments are expected to grow at a constant rate of 11.2% per year.
If investors pay $1,200 for each bond, what is the value of each warrant attached to the bond issue? Round your answer to the nearest cent.
$
What is the component cost of these bonds with warrants? Round your answer to two decimal places.
What premium is associated with the warrants? Round your answer to two decimal places.