Reference no: EM13478447

Fact Situation

NewCo Inc. a company formed recently trades on the stock exchange and its stock currently trades at $8 per share (today). NewCo wishes to issue a debt (bond offering) to help finance a joint venture with another company. NewCo has tremendous prospects as it has edge technology it sells to other companies. However, NewCo's investor bankers suggest the company consider issuing debt with warrants attached to entice investors to buy the debt offering. The investor bankers explain to NewCo's CFO that the company could issue debt with no warrants at 9% interest rate. If NewCo includes 25 warrants with each $1,000 bond (each warrants allows the investor to buy one share of stock at a set exercise price), the company can issue debt with a 7% interest rate.

The investor bankers tell NewCo that they can raise $50 Million in a private placement. The investor bankers have five pension funds that will take a $10 Million slice of the bond offering. The deal structure is: each warrant is exerciseable into one share at $25 per share ($25 Exercise Price) any time within the next seven years. The debt will have a seven year life at the 7% interest rate with interest payed annually by NewCo to the pension funds buying the debt. Each bond gets issued at $1,000 per bond.

Questions

You have been asked to compute the following based on the fact situation in the three paragraphs above.

1. Compute the value of the bond and the value of each warrant upon the sale of the bond offering to the pension funds as of today when the bonds get issued.

2. Compute the intrinsic value of each warrant. [Here, we require additional facts. We are assuming now that we are five years down the road (five years in the future from the bond offering date). NewCo has done tremendous and its stock now trades for $43 per share].

3. Compute the time value for each warrant as of this five year date from part two. Here, we assume that each warrant sells for $24 per share.

4. If one of the pension funds that invested, $10 Million in the bond offering goes ahead and sells its detachable exchange traded warrants as of the question three price they will receive how many $ from their warrants.