The following data apply to Saunders Corporation: Saunders Corporation currently

Question

The following data apply to Saunders Corporation: Saunders Corporation currently has 1,000,000 common stocks outstanding. It considers raising $10 million through issuing 20-year 6.2% coupon bonds – annually paid - with 15 warrants. Each bond has a face value of $1,000. Each warrant gives the holder the right to purchase one share of stock. The bonds will be sold at par. Each warrant has a strike price of $25 and 10 years until expiration. The interest rate of 20-year annual payment bond without warrants is 11.1%. Assume the total value of Saunders Corporation right before the warrants will be exercised is $75) million Assume, at Year 10, when the warrants are about to expire, Saunders Corporation's stock price rise significantly from $20 when the bonds with warrants were issued to $35. What will be the total value, in millions, of Saunders Corporation's debt at Year 10 after the warrants are exercised?

Explanation / Answer

At year 10, the value of debt will be

Face value 1000

Coupon 62

N 10

Yield 11.1%

Price 712.64,

No.of bonds issued is 10,000.For 10,000 bonds value will be 7,126,400.

Each bond has 15 warrents, since the market price of stock is 35 warrents will be exercised.

15 ×10,000 × 25 =3,750,000.

So total value will be 10,876,400

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