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Coupon Rates and Valuation

The ABC Corporation is setting its terms on a new issue with warrants. The bonds have a 30-year maturity and semiannual coupon. Each bond will have 25 warrants attached which give the holder the right to purchase one share of Random stock per warrant. ABC's investment banker estimates that each warrant has a value of $15.50. A similar straight-debt issue would require a 10.0 percent coupon. What coupon rate should be set on the bonds so that the package would sell for $1,000?

Coupon Rate ___________

2. ABC is considering purchasing a smaller chain, XYZ software. ABC's financial analysts project that the merger will result in incremental net cash flows of $3 million in Year 1, $5 million in Year 2, $7 million in Year 3, and $10 million in Year 4. The company expects to start with 30%supernormal growth, and 5% normal growth at the end of the fourth year. Assume all cash flows occur at the end of the year. XYZ's post merger beta is estimated to be 1.5, the risk free rate is 6 percent, and the market returns are11 percent. What is the value of XYZ Software to ABC software?
Value: $ __________

Solution Summary

The solution explains how to determine the coupon rate so that the package is sold at par and also valuation of a firm.