Assumptions:

a$.$ There are $6$ million shares of common stock.

b$.$ A $$1000$ par value bond with warrant allows the investor to use the warrant and buy $15$ shares of common stock at $$12$ each.

c$.$ The expiration of warrant is $10$ years from now.

d$.$ The bond is a $10-$year bond. Thus, after the warrant is exercised, the bond will have $10$ more years before maturity.

e$.$ There are $30,000$ bonds.

f$.$ The going rate of interest at the beginning is $5\%.$

g$.$ The bond with the warrant is offering $4\%$ coupon.

h$.$ The current value of annual operations and investments of the firms is $$125$ million and is expected to grow at $4\%$ per year.

This problem requires calculations in several steps, so expand this file to include your answers.

$4$ A$.$ Calculate the return to warrant holder.

$4$B$.$ Calculate the value of the firm.

$4$C$.$ Calculate the value of equity of the firm.

$4$D$.$ Calculate the effective cost of issuing the bond with attached warrants to the company.