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    Hybrid and Derivative Securities

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    I am having a hard time grasping these concepts.

    A. Under the debt with warrants, find the following
    (1) Straight debt value
    (2) Implied price of all warrants
    (3) Implied price of each warrant
    (4) Theoretical value of a warrant

    B. On the basis of A, do you think that the price of the debt with warrants is too high or too low? Explain.

    C. Assuming that the firm can raise the needed funds under the specified terms, which debt financing alternatives  - debt or debt with warrants - would recommend in view of your findings above? Explain.

    D. For the purchase alternative, financed as recommended is part c, calculate the following:

    (1) The annual interest expense deductible for tax purchases for each of the next three years.
    (2) The after tax outflow for each for the next three years.
    (3) The present value of cash outflows using the appropriate discount rate

    E. For the lease alternative, calculate the following:

    1. The after-tax cash outflow for each of the next 3 years
    2. The present value of the cash outflows using the appropriate discount rate applied in part D3.

    F. Compare the present value of the cash outflow streams for the purchase (in part D3) and lease (in part E2) alternatives, and determine which would be preferable. Explain and discuss your recommendations.

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    Solution Summary

    Hybrid and derivative securities are examined.