Question

Bonds with Detachable Warrants Langdon & Co. issues bonds with a face value of $50,000 for $51,000. Each $1,000 bond carries 10 warrants, and each warrant allows the holder to acquire one share of $1 par common stock for $40 per share. Immediately after the issuance, the bonds are quoted at 99 ex rights and the warrants are quoted at $5 each. Calculate the value to be assigned to the bonds and to the warrants. Round your answers to two decimal places.

Value assigned to bonds	$
Value assigned to warrants	$

Answer 1

Market Value of bonds Without Warrant = ($1000 x 99%) x $50,000/$1000	$49,500.00
Market Value of bonds With Warrant ($5 x $50000/$1000 x 10)	$2,500.00
Issuance Price	$51,000.00
Value assigned to bonds = (MV of Bonds without warrant /MV of Bonds Without Warrant + MV of Bonds With warrant) x Issue price
Value assigned to bonds = ($49,500/($49500 + 2500)) x $51000	$48,548.08
Value assigned to Warrant = (MV of Bonds warrant /MV of Bonds Without Warrant + MV of Bonds With warrant) x Issue price
Value assigned to Warrant = ($2500/($49500 + 2500)) x $51000	$2,451.92