2. Warrants Aa Aa Warrants are long-term options to buy a stated number of commo
ID: 2408364 • Letter: 2
Question
2. Warrants Aa Aa Warrants are long-term options to buy a stated number of common shares at a specified price that is generally attached to debt issues. Warrants are attached to debt in hopes of enticing investors to buy lower-coupon, long-t give investors the chance to profit from the firm's upside potential. Warrants are like long-term erm debt, because O Put options O Call options Triptych Food Corp. is issuing new five-year bonds with 17 warrants attached to each $1,000 par value bond. Triptych Food Corp. wanted to issue the bonds at par, but a straight-debt bond (without warrants) would have required a 12.00% coupon rate. Instead, the attached warrants allow Triptych Food Corp. to issue the bonds at par with a 7.20% coupon, calculate the straight value of the bond and the value of each warrant in the following table. (Note: Assume that the company pays annual coupons.) Value What is the straight value of the bond? What is the value of each warrant? The consensus opinion of analysts is that Triptych Food Corp. undervalued the warrants that 'it attached to its bonds. rding to the analysts, is the coupon rate on Triptych Food Corp.'s bonds too high or too low?Explanation / Answer
1)Call option (like warrants) give investors right to buy shares at a value lower than current market price .(that is if option is favorable ,they will exercise otherwise not)
2)Annual Interest = 1000*.072 = 72
staright value of bond = [PVA12%,5 *Interest ]+[PVF 12%,5* Face value]
=[3.60478*72]+ [.56743*1000]
= 259.54+ 567.43
= 826.97
B)Value of 17 warrants = 1000-826.97= 173.03
Value of each warrant = 173.03/ 17 = $ 10.18 per warrant
3)The coupon rate is too high leading to high value for bond and lower value for warrants .
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