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One possibility is to issue a bond with warrants. The current stock price is $20. A 20 year annual coupon bond without warrants would require
- One possibility is to issue a bond with warrants. The current stock price is $20. A 20 year annual coupon bond without warrants would require 10% interest. Suppose 45 warrants were attached to the bond, each with an exercise price of $25, to each $1000 bond. Suppose also each warrant could be separated and traded individually at a value of $3
- What coupon rate should be set on the bond with warrants if the total package is to sell at par (that is, $1000). (2 points)
- Suppose the bonds were issued and the warrants immediately traded on the open market for $5 each what would that imply about the terms of the issue? Did the company win or lose on their issue? Why do you say this? (2 points)
- When would you expect the warrants to be exercised? Assume the warrants have a 10 year life- the expire ten years after issue. (2 points)
- Will the warrants bring in additional capital when exercised? If so how much and what type of capital? (2 points)
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