JMR Ltd.issued $100,000 of 8%, 8 year, non-convertible bond with detachable stock purchase warrants.KER Corp.purchased the entire issue.Each $1,000 bond carries 10 warrants.Each warrant entitles KER to purchase one common share for $20.The bond issue sells for 104 exclusive of accrued interest.Shortly after issuance, the warrants trade for $5 each and the bonds were quoted at 103 ex-warrants.The allocation of the proceeds to bonds using the proportional method was:
A)$108,000
B)$107,000
C)$99,185
D)$100,000

Question

Quizplus · Accepted Answer

The proportional method allocates the proceeds between the bonds and the warrants based on their relative fair values. The fair value of the warrants is $5 each, and there are 10 warrants per $1,000 bond, so $50 per bond. With $100,000 of bonds, that's 100 bonds, making the total warrant value $5,000. The bonds ex-warrants are quoted at 103, or $103,000 for the entire issue. The total proceeds are $104,000 (104% of $100,000). The proportion allocated to the bonds is $103,000 / ($103,000 + $5,000) = $103,000 / $108,000 = 95.37%. Thus, 95.37% of $104,000 = $99,185 is allocated to the bonds.

JMR LtdIssued $100,000 of 8%, 8 Year, Non-Convertible Bond with Detachable