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Warrants
Maese Industries Inc. has warrants outstanding that permit the holders to purchase 1 share of stock per warrant at a price of $27.
A) Calculate the exercise value of the firm's warrants if the common sells at each of the following prices: (1) $20, (2) $25, (3) $30, (4) $100. (Hint: A warrant's exercise value is the difference between the stock price and the purchase price specified by the warrant if the warrant were to be exercised.)
1. $20=
2. $25=
3. $30=
4. $100=
B) Assume the firm's stock now sells for $20 per share. The company wants to sell some 20-year, $1,000 par value bonds with interest paid annually. Each bond will have attached 50 warrants, each exercisable into 1 share of stock at an exercise price of $25. The firm's straight bonds yield 8%. Assume that each warrant will have a market value of $2.5 when the stock sells at $20. What coupon interest rate must the company set on the bonds with warrants if they are to clear the market? (Hint: The convertible bond should have an initial price of $1,000.) Round your answer to two decimal places.
____ %
C. What dollar coupon must the company set on the bonds with warrants if they are to clear the market? (Hint: The convertible bond should have an initial price of $1,000.) Round your answer to the nearest dollar.
$_____
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