Maese Industries Inc. has warrants outstanding that permit the holders to purcha

Question

Maese Industries Inc. has warrants outstanding that permit the holders to purchase 1 share of stock per warrant at a price of $26. Calculate the exercise value of the firm's warrants if the common sells at each of the following prices: $20, $25, $30, $100. 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 S25. The firm's straight bonds yield 8%. Assume that each warrant will have a market value of $3.75 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? 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? Round your answer to the nearest dollar.

Explanation / Answer

a. Expiration value = Current price - Striking price.

Current Striking Expiration
Price Price Value   
$ 20 $25 -$5 or 0
25 25 0
30 25 5
100 25 75


b.
VB = $1,000 - $(3.75*100) = 625$

$625 =   
= I*9.82 + $1,000/(1.08)^20

= 625-214.55 =410.45/9.82 = 41.79

4.18% would be coupon

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