Question

1. Assume the firm's stock now sells for $20 per share. The company wants to sell some 20-year, $1,000 par value bonds with interest paid annually. Each bond will have attached 100 warrants, each exercisable into 1 share of stock at an exercise price of $25. The firm's straight bonds yield 8%. Assume that each warrant will have a market value of $3.5 when the stock sells at $20. What coupon interest rate must the company set on the bonds with warrants if they are to clear the market? (Hint: The convertible bond should have an initial price of $1,000.) Do not round intermediate calculations. Round your answer to two decimal places.

%

What dollar coupon must the company set on the bonds with warrants if they are to clear the market? (Hint: The convertible bond should have an initial price of $1,000.) Do not round intermediate calculations. Round your answer to the nearest dollar.

$  

Answer 1

given intial value =$1000

value convesion option=no of warrant * market value

=100*3.5

$350

intial price of bond= present value of maturity value +PVAF*interest + market value of conversion option

1000=$1000*PVF(8%, 20th year)+interest*PVAF(8%,20 years)+350

1000=$1000*0.2145+interest*9.8181+350

1000=214.5+350+interest*9.8181

interest*9.8181=1000-214.5-350

interst*9.8181=435.5

interst=44.35

coupon rate=(interet/facevalue)*100

=(44.35/1000)*100

=4.44%

dollar amount is $1000*44.4%= $44.4

if you like my work giveme thumbs up, thanks for giving this opportunity