Question

Assume the firm's stock now sells for $20 per share. The company wants to sell some...

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 75 warrants, each exercisable into 1 share of stock at an exercise price of $25. The firm's straight bonds yield 12%. Assume that each warrant will have a market value of $4 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.

PLEASE SHOW WORK

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Homework Answers

Answer #1

Solution:-

Market Value of Warrant = 75 warrants * $4

Market Value of Warrant = $300

Initial Price = $1,000

Initial Price = Straight value of bond + Market Value of Warrant

$1,000 = Straight value of bond + $300

Straight value of bond = $1,000 - $300

Straight value of bond = $700

By Applying PMT function, To Calculate Coupon Payment-

Coupon Payment = $79.84

Coupon Interest Rate =

Coupon Interest Rate =

Coupon Interest Rate = 7.984%

If you have any query related to question then feel free to ask me in a comment.Thanks.

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