Question

Peter Krone is the chief financial officer ( CFO) of Echo Inc. The firm was founded seven years ago to provide educational services for the rapidly expanding primary and secondary school marketsAlthough Echo Inc. has done well, the firm's founder believes that an industry shakeout is imminent. To survive, Echo Inc. must grab market share now, and this will require a large infusion of new capital Because he expects earnings to continue rising sharply and looks for the stock price to follow suit, Mr. Krone does not think it would be wise to issue new common stock at this time. On the other hand, interest rates are currently high by historical standards, the interest payments on a new debt issue would be prohibitive. Thus, he has chosen to finance the needed capital using bonds with warrants Mr. Krone estimates that Echo Inc. could issue a bond- with-warrants package consisting of a 20-year bond and 27 warrants. Each warrant would have a strike price of $25 and 10 years until expirationIt is estimated that each warrant, when detached and traded separately, would have a of $5. The coupon on a similar bond but without warrants would be 10%

What coupon rate should be set on the bond with warrants if the total package is to sell for $1,000? *

6.96%

7.80%

8.41%

9.62%

None of the above

24. If Echo Inc. issues 100,000 bond-with-warrant packages, how much cash will Echo Inc. receive when the warrants are exercised? *

$25.9 million

$48.6 million

$52.3 million

$67.5 million

None of the above

25. How many shares of stock will be outstanding after the warrants are exercised? (Echo Inc. currently has 20 million shares outstanding). *

28.7 million shares

25.7 million shares

22.7 million shares

29.8 million shares

None of the above

Answer 1

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