Mac co. has warrants outstanding that permit the holders to purchase 1 share of stock per warrant at a price of $25. 1) Calculate the exercise value of the firms warrant if the common stock sells at each of following prices: $20 and $100.

2) Assume if the firms stock now sells for $20 per share. The company wants to sell some 20-year, $1000 par value bonds with interest paid annually. Each bond will have attached 50 warrants, each exercisable into 1 share of stock at an exercise price of $25. The firms straight bonds yield 12%. Assume that each warrant will have a market value of $3 when the stock sells at $20. What coupon interest rate must the company set on the bonds with warrants if they are to clear the market (Hint: the convertible bond should have an initial price of $1000).