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Debt with Warrants Analysis

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I am trying to determine how to answer the following from the information and data I have completed within the problem.

Question: On the basis of my findings, is the price of the debt with warrants to high or too low? Explain.

Information
The firm can borrow the full $3 million from Southern National Bank. The bank will charge 10% annual interest and will. In addition, require a grant of 50,000 warrants, each allowing the purchase of two shares of the firm's stock for $30 per share at any time during the next 10 year. The stock is currently selling for $28 per share, and the warrants are estimated to have a market value of $1 each. The price (market value) of the debt with the warrants attached is estimated to equal the $3 million initial loan principal. The annual end-of-year payments on this loan will be $ 1,206,345 over the next 3 years. Depreciation, maintenance, insurance, and other costs will have the same cost and treatments under this alternative as those described before for the straight debt-financing alternative.

My question is ... why is it not benificial to have an implied price higher than the theoretical value?

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First, the implied value of a warrant is the price that was effectively paid for ...

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The solution examines debt with warrants analysis.

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Debt and Assets Analysis

Sepracor Inc, a drug company reported the following information. The company prepares the financial statement in accordance with GAAP.
Current Liabilities.....................................$554,114
Convertible subordinated debt...................648,020
Total liabilities..........................................1,228,313
Stockholders equity...................................176.413
Net income...................................................58,333

Analysis attempting to compare Seprator to drug companies that issue debt with detachable warrants may face a challenge due to differences in accounting for convertible debt.
Instruction:

(A) Compute the following ratios for Seprator Inc. ( Assume that year-end balances approximate annual averages)
(1) Return on assets.
(2) Return on stockholders equity.
(3) Debt to assets ratio.

(B) Briefly discuss the operating performance and financial position of Seprator Industry averages for these ratios in 2007were :ROA 3.5% ;return on equity 16%;and debt to assets 75%. Based on this analysis, would you make an investment in the company's 5% convertible bonds? Explain.
(C) Assume you want to compare Sepracor to an IFRS company like Merck (which issues nonconvertible debt with detachable warrants). Assuming that the fair value ot the equity component of Sepracor convertible bonds is $150,000, how would you adjust the analysis above to make valid comparisons between Sepracor and Merck?

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