Potter Industries Inc. has warrants outstanding that permit its holders to purchase 1 share of stock per

Question:

Potter Industries Inc. has warrants outstanding that permit its holders to purchase 1 share of stock per warrant at a price of $18. (Refer to Chapter 18 for parts a, b, and c.)

a. Calculate the exercise value of Potter’s warrants if the common stock sells at each of the following prices: $18, $21, $25, and $70.

b. At what approximate price do you think the warrants would sell under each condition indicated in part a? What premium is implied in your price? Your answer will be a guess, but your prices and premiums should bear reasonable relationships to each other.

c. How would each of the following factors affect your estimates of the warrants’ price sand premiums in part b?

1. The life of the warrant is lengthened.

2. The expected variability (sp) in the stock’s price decreases.

3. The expected growth rate in the stock’s EPS increases.

4. The company announces the following change in dividend policy: Whereas it formerly paid no dividends, henceforth it will pay out all earnings as dividends.

d. Assume that Potter’s stock now sells for $18 per share. The company wants to sell some 20-year, annual interest, $1,000 par value bonds. Each bond will have 25 warrants,and each warrant entitles the holder to buy 1 share of stock at a price of $21.Potter’s straight debt yields 10%. Regardless of your answer to part b, assume that the warrants will have a market value of $1.75 when the stock sells at $18. What annual coupon interest rate and annual dollar coupon must the company set on the bonds with warrants if the bonds are to clear the market (i.e., the market is in equilibrium)?Round to the nearest dollar or percentage point.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...

Fantastic news! We've Found the answer you've been seeking!