Question

Srorm Software wants to issue $80 million ($800 x 100,000 bonds) in new capital to fund new opportunities. If Storm raised the $80 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 24 warrants per $800 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 11.4% per year.

If investors pay $800 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.

  %

Answer 1