Problem 20-3 Warrants Maese Industries Inc. has warrants outstanding that permit
ID: 2731407 • Letter: P
Question
Problem 20-3
Warrants
Maese Industries Inc. has warrants outstanding that permit the holders to purchase 1 share of stock per warrant at a price of $27.
Calculate the exercise value of the firm's warrants if the common sells at each of the following prices: (1) $20, (2) $25, (3) $30, (4) $100. (Hint: A warrant's exercise value is the difference between the stock price and the purchase price specified by the warrant if the warrant were to be exercised.)
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 9%. 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.) 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.) Round your answer to the nearest dollar.
$
Explanation / Answer
Answer Part 1 :
Exercise value of warrants = Stock price - Purchase price specified by warrant
Answer Part 2 :
Value of warrants + Value of bond =$1,000
Value of warrants:
No of warrants = 100
Warrant Value = $4
Thus, Total value =$400
Value of bond:
n = 20 Years
r =9% per year
PVIF = 0.17843
PVIFA = 9.12855
Redemption value = Par value =$1,000
PVIF*Redemption value = $178.43
PVIFA*Interest payment per period = 9.12855 * Interest payment per period
$400 + 178.43 + 9.12855 * Interest payment per period = $1,000 Interest
9.12855 * Interest payment per Period = $421.57
Interest payment per Period = $46.18
= $46 (Rounded off)
Therefore, the annual dollar coupon payment = 4.6%
Therefore, the coupon rate = 4.6%
Therefore, the company would set a coupon interest rate of 4.60%, producing an annual interest payment I = $46.
Warrents Exercise Value 1 (7) 2 (2) 3 3 4 73Related Questions
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