Maese Industries Inc. has warrans outstanding that permit the holders to purchas

Question

Maese Industries Inc. has warrans outstanding that permit the holders to purchase 1 share of stock per warrant t a price of $25.
Calculate the excersie 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.)

b) Assumes the firms stock now sells for $20/share. The company wants to sell some 20 year, $ 1000 par value bonds with interest paid annually. Each bond will have attached 50 warrants, each exerciable into 1 share of stock at an exercise price of $25. The firms straight bonds yield 12%.Assume that each warrant wil have a market value of $3 when the stock sells at $20. What coupon interest rate and dollar coupon , must the company set on the bonds with warranty if they are to clear the market?( Hint : The convertible bond should have an initial price of $1,000).

Please provide an expanantion to part b.

thanks

Explanation / Answer

Exercise value of warrants = Stock price - Purchase price specified by warrant

1) Exercise value of warrants = 20-25 = -$5.00

2) Exercise value of warrants = 25-25 = $0.00

3) Exercise value of warrants = 30-25 = $5.00

4) Exercise value of warrants = 100-25 = $75.00

b)

Value of warrants + Value of bond =$1,000

Value of warrants:

No of warrants = 50

Warrant Value = $3

Thus, Total value =$150

Value of bond:

n =20 Years

r =12% per year

PVIF =0.10367

PVIFA =7.4694

Redemption value = Par value =$1,000

PVIF*Redemption value =$103.67

PVIFA*Interest payment per period =7.4694 * Interest payment per period

$150 + 103.67 + 7.4694 * Interest payment per period $1,000 Interest

7.4694* Interest payment Payment per Period =$746.33

Interest payment Payment per Period =$99.92

Therefore, the annual dollar coupon payment =99.92

Therefore, the coupon rate =9.992%

Therefore, the company would set a coupon interest rate of 9.992%, producing an annual interest payment I = $99.92.

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