Mr. English wants to further analyze Alternative B:

i. What is the current value of the bond issue excluding the warrants? Assume semi-annual coupon payments and prevailing market rate of 12.5% per annum.

1 Assume Mr. English has the following alternatives available to him in 1983: Alternative A: $500 million of 12.5% coupon, 20-year subordinated debentures and A $400 million of common stock Alternative B: $1 billion of bonds and detachable warrants sold in $1,000 units; each consisting of: (i) a $1,000 face value, 75/% coupon, 10-year, callable, subordinated debenture; and (ii) 18.18 callable, 5-year warrants, each entitling the holder to purchase one share of stock for $55.00 (the stock price at the time was $47 a share). 1