Issuance of Multiple Securities Garbanzo Corporation issues 100,000 shares of $100-par preferred stock for $107 per share. With each share purchased, | stock warrant is included. Holders of warrants can purchase | share of Garbanzo’s common stock for $10 and 2 warrants at any time during the next 5 years. Based on the dividend yield of the preferred stock, its limited call protection, and other features, the underwriters estimate that the preferred stock would sell for $101 per share without the warrants. They are unable to estimate directly the value of the warrants.

a. Because the stock warrants are, in effect, being sold along with the preferred stock, a portion of the issue price will have to be allocated to the warrants, and the warrants will be reported as a separate item in the stockholders’ equity section of Garbanzo’s balance sheet. How much of the issue proceeds do you think should be assigned to Preferred Stock, Additional Paid-in Capital, and Stock Warrants Outstanding in Garbanzo’s balance sheet? Explain.

b. Why would Garbanzo give the stock warrants to purchasers of its preferred stock? What are the advantages to Garbanzo? What disadvantages might there be?