Assume the firm's stock now sells for $30 per share. The company wants to raise $10 million by issuing 20-year, annual interest, $1,000 par value bonds. Each bond will have attached 60 warrants, each exercisable into 1 share of stock at an exercise price of $35. The firms straight bonds yield 10 percent. Each warrant is expected to have a market value of $2 when the stock sells at $30. The company wants to establish a coupon interest rate and dollar coupon to ensure that the bonds will clear the market.
a. Calculate the value of the debt portion of the bonds with warrants.
b. Calculate the dollar coupon amount per bond with warrants.
c. Calculate the coupon interest rate that should be set on the bonds with warrants.
This solution explains how to calculate the value of the debt portion of the bonds with warrants.