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Assume the firm's stock now sells for $30 per share. The company wants to raise $20 million by issuing 20-year, annual interest, $1,000 par value bonds. Each bond will have 40 warrants attached, each exercisable into 1 share of stock at an exercise price of $36. The firms straight bonds yield 8%. Each warrant is expected to have a market value of $0.75 when the stock sells at $30. The company wants to establish a coupon interest rate and dollar coupon to ensure that the bonds will clear the market.
a. Calculate the value of the debt portion of the bonds with warrants.stock price $30bonds-life and par value 20par value $1,000#of warrants per bond 40exercise price $36warrant market value @ P=$30yield of straight bonds 8%
B. Calculate the dollar coupon amount per bond with warrants
c. Calculate the coupon interest rate that should be set on the bonds with warrants.
d. Identify 2 or 3 advantages to the company of issuing a bond with warrants instead of straight bonds.
e. Identify 2 or 3 advantages to the investor of buying a bond with warrants instead of straight bonds.
Now suppose that the bond is a TIPS. What will be your real and nominal return?
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