Warren Corporation's stock sells for $42 per share.The company wants to sell some 20-year,annual interest $1,000 par value bonds.Each bond would have 75 warrants attached to it,each exercisable into one share of stock at an exercise price of $47.The firm's straight bonds yield 10%.Each warrant is expected to have a market value of $2.00 given that the stock sells for $42.What coupon interest rate must the company set on the bonds in order to sell the bonds with warrants at par?

Question

Quizplus · Accepted Answer

To sell the bonds with warrants at par, the total value of the bond with warrants should be equal to the sum of the straight bond value ($1,000/0.1=$10,000) and the value of the warrants (75*$2=$150).

Let x be the coupon interest rate. Then, we can set up the following equation:

$1,000 = [x*(1-1/((1+0.1)^20))]/0.1 + 150/(1+0.1)^20

Solving for x, we get:

x = 8.24%  (rounded to two decimal places)

Warren Corporation's Stock Sells for $42 Per Share