Coupon interest rate on warrants. Please see the attachment.
Shearson PLC's stock sells for $42 per share. The company wants to sell some 20-year, annual interest, $1,000 par value bonds. Each bond will have attached 75 warrants, each exercisable into one share of stock at an exercise price of $47. Shearson's straight bonds yield 10 percent. The warrants will have a market value of $2 each when the stock sells for $42. What coupon interest rate must the company set on the bonds-with-warrants if the bonds are to sell at par?
The bonds and warrants should sell at the value of $1,000 which is the par value. We find the value of bond so as to ...
The solution explains how to determine the coupon rate on bonds such that it sells for par