A warrant is a long-term option from a company that gives the holder the right t

Question

A warrant is a long-term option from a company that gives the holder the right to buy a stated number of shares of the firm’s stock at a specified price for a specified length of time. Generally, warrants are distributed with debt, and they are used to induce investors to buy long-term debt that carries a lower coupon rate than would otherwise be required. The exercise of warrants brings in additional funds to the firm.

A corporation decides to issue 10-year bonds to fund a necessary expansion. If they were straight bonds, they would carry an 7% annual coupon. However, the bonds with warrants can be sold with a 5% coupon. Thus, investors would be paying $900 in return for the 5% coupon, 10-year bond and 19 warrants.

What is the total value of the warrants and the value of each warrant? Round your answers to the nearest cent.

Value of the warrants = $

Value of each warrant = $

Explanation / Answer

Interest if straight bond were issued = 900*7% = $63

Interest when bond issued with warrants = 900*5% = $45

Therefore, total value of the warrants = $63-$45 = $18

Value of each warrant = $18/19 warrants = $0.95

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