Question 1: A warrant is a long-term option from a company that gives the holder the...

Question 1: 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 a 9% annual coupon. However, the bonds with warrants can be sold with an 8% coupon. Thus, investors would be paying $700 in return for the 8% coupon, 10-year bond and 16 warrants.

What is the price of the 8% coupon bonds? Do not round intermediate calculations. Round your answer to the nearest cent.

_____________

Question 2: 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 a 7% annual coupon. However, the bonds with warrants can be sold with a 5% coupon. Thus, investors would be paying $1,100 in return for the 5% coupon, 10-year bond and 20 warrants.

What is the total value of the warrants and the value of each warrant? Do not round intermediate calculations. Round your answers to the nearest cent.

Value of each warrant is _________

Value of the warrants in total _________

Question 3: 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 a 9% annual coupon. However, the bonds with warrants can be sold with an 8% coupon. Thus, investors would be paying $900 in return for the 8% coupon, 10-year bond and 22 warrants.

Suppose that the warrants expire in 5 years, and the exercise price on the warrants is $10. (Remember that each bond includes 22 warrants.) The firm’s current stock price is $8.00, but the price is expected to grow by 13% per year. Assuming that the warrants will not be exercised prior to expiration, what is the overall rate of return to investors? Do not round intermediate calculations. Round your answer to one decimal place.

___________%

Solutions

Expert Solution

Let the Face value of Bond be =$1000

(face value is nowhere mentioned in the question, Please make sure its mentioned next time- it's a crucial data point)

Request: Its a finance question, so I am comfortable in writing on notes instead of typing (hope you understand). Thank you in Advance.

Q1. Price=$935.82

Q2. a) $240.472

b) $12.0236

Q3. 10.8%

jeff jeffy answered 1 week ago

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