Mr. Duncan has decided to eliminate preferred stock as one of the alternatives and focus on the others. EduSofts 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%.

a. ) How would you expect the cost of the bond with warrants to compare with the cost of straight debt? With the cost of common stock (which is 13.4%)?

b.) The corporate tax rate is 25%, what is the after-tax cost of the bond with warrants?