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Hybrid Debt

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Warren Corporation's stock sells for $42 per share. The company wants to sell some 20-year, annual interest, $1,000 par value bonds. Each bond would have 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm's straight bonds yield 10%. Each warrant is expected to have a market value of $4.00 given that the stock sells for $42. What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par?

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Solution Summary

The solution computes coupon price when company wants to sell bond attached with warrants.

Solution Preview

Given,

Warrant Price = $4
Warrant = 75

We need to calculate the present value of ...

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