All work must be shown in Excel with breakdown of how you derive at solution.
1. Breuer Investment's convertible bonds have a $1,000 par value and a conversion price of $50 a share. What is the convertible issue's conversion ratio?
a. Calculate the exercise value of the firms warrants if the common sells at each of the following prices:
$20 $25 $30 $100 (Hint: A warrant's exercise value is the difference between the stock price and the purchase price specified by the warrant if the warrant were to be exercised).
b. Assume the firm's stock now sells for $20 per share. The company wants to sell some 20-year, $1,000 par value bonds with interest paid annually. Each bond will have attached 50 warrants, each exercise into 1 share of stock at an exercise price of $25. The firm's straight bonds yield 12%. Assume that each warrant will have a market value of $3 when the stock sells at $20. What coupon interest rate, and dollar coupon, must the company set on the bonds with warrants if they are to clear the market? (Hint: The convertible bond should have an initial price of $1,000).
Solution depicts the steps to calculate conversion ratio, warrant exercise value and coupon rate in the given case.