Mr$.$ Duncan has decided to eliminate preferred stock as one of the alternatives and focus on the others. EduSoft$$s investment banker estimates that EduSoft could issue a bond$-$with$-$warrants package consisting of a $20-$year bond and $27$ warrants. Each warrant would have a strike price of $$25$ and $10$ years until expiration. It is estimated that each warrant, when detached and traded separately, would have a value of $$5.$ The coupon on a similar bond but without warrants would be $10\%.$

Because the presence of warrants results in a lower coupon rate on the accompanying debt issue, shouldn$$t all debt be issued with warrants? To answer this, estimate the anticipated stock price in $10$ years when the warrants are expected to be exercised, and then estimate the return to the holders of the bond$-$with$-$warrants packages. Use the corporate valuation model to estimate the expected stock price in $10$ years. Assume that EduSoft$$s current value of operations is $$500$ million and it is expected to grow at $8\%$ per year.

If the corporate tax rate is $25\%,$ what is the after$-$tax cost of the bond with warrants?

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