Explore BrainMass

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.

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?


Solution Preview

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.