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Debt with Warrants Analysis

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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Dear Student,

Thank you for using BM.

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

Solution Summary

The solution examines debt with warrants analysis.

$2.19