Hybrid Financing: Preferred Stock, Warrants, and Convertibles: Warrants

Quantitative Problem $1$: A warrant is a long$-$term option from a company that gives the holder the right to buy a stated number of shares of the firm's stock at a specified price for a specified length of time. Generally, warrants are distributed with debt, and they are used to induce investors to buy long$-$term debt that carries a lower coupon rate than would otherwise be required. The exercise of warrants brings in additional funds to the firm.

A corporation decides to issue $10-$year bonds to fund a necessary expansion. If they were straight bonds, they would carry a $6\%$ annual coupon. However, the bonds with warrants can be sold with a $5\%$ coupon. Thus, investors would be paying $$1,200$ in return for the $5\%$ coupon, $10-$year bond and $21$ warrants.

What is the price of the $5\%$ coupon bonds? Do not round intermediate calculations. Round your answer to the nearest cent. $

Quantitative Problem $2$: A warrant is a long$-$term option from a company that gives the holder the right to buy a stated number of shares of the firm's stock at a specified price for a specified length of time. Generally, warrants are distributed with debt, and they are used to induce investors to buy long$-$term debt that carries a lower coupon rate than would otherwise be required. The exercise of warrants brings in additional funds to the firm.

A corporation decides to issue $10-$year bonds to fund a necessary expansion. If they were straight bonds, they would carry an $8\%$ annual coupon. However, the bonds with warrants can be sold with a $6\%$ coupon. Thus, investors would be paying $$700$ in return for the $6\%$ coupon, $10-$year bond and $15$ warrants.

What is the total value of the warrants and the value of each warrant? Do not round intermediate calculations. Round your answers to the nearest cent.

Value of the warrants $=$$

Value of each warrant $=$$

Quantitative Problem $3$: A warrant is a long$-$term option from a company that gives the holder the right to buy a stated number of shares of the firm's stock at a specified price for a specified length of time. Generally, warrants are distributed with debt, and they are used to induce investors to buy long$-$term debt that carries a lower coupon rate than would otherwise be required. The exercise of warrants brings in additional funds to the firm.

A corporation decides to issue $10-$year bonds to fund a necessary expansion. If they were straight bonds, they would carry a $6\%$ annual coupon. However, the bonds with warrants can be sold with a $5\%$ coupon. Thus, investors would be paying $$1,200$ in return for the $5\%$ coupon, $10-$year bond and $20$ warrants.

Suppose that the warrants expire in $5$ years, and the exercise price on the frarrants is $$9.($Remember that each bond includes $20$ warrants.$)$ The firm's current stock price is $$7\mathrm{.}00,$ but the price is expected to grow by $14\%$ per year. Assuming that the warrants will not be exercised prior to expiration, what is the overall rate of return to investors? Do not round intermediate calculations. Round your answer to one decimal place.

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