C. historical standards, and with the firm's B rating, the interest payments on a new debt issue would be prohibitive. Thus, he has narrowed his choice of financing alternatives to two securities: (1) bonds with warrants or (2) convertible bonds. As Duncan's assistant, you have been asked to help in the decision process by answering the following questions: a. How does preferred stock differ from both common equity and debt? Is pre- ferred stock more risky than common stock? What is floating rate preferred stock? How can a knowledge of call options help a financial manager to better understand warrants and convertibles? One of the firm's alternatives is to issue a bond with warrants attached. EduSoft's current stock price is $20, and its investment banker estimates that the cost of a 20-year, annual coupon bond without warrants would be 10%. The bankers suggest attaching 45 warrants, each with an exercise price of $25, to each $1,000 bond. It is estimated that each warrant, when detached and traded separately, would have a value of $3. (1) What coupon rate should be set on the bond with warrants if the total package is to sell for $1,000? (2) Suppose the bonds were issued and the warrants immediately traded on the open market for $5 each. What would this imply about the terms of the issue? Did the company "win" or "lose"? (3) When would you expect the warrants to be exercised? Assume they have a 10-year life; that is, they expire 10 years after issue. (Hint: Recall that the call must be made on an anniversary date of the issue.)