Question
Srorm Software wants to issue $130 million ($1,300 x 100,000 bonds) in new capital to fund new opportunities. If Storm raised the $130 million of
Srorm Software wants to issue $130 million ($1,300 x 100,000 bonds) in new capital to fund new opportunities. If Storm raised the $130 million of new capital in a straight-debt 20-year bond offering, Storm would have to offer an annual coupon rate of 11%. However, Storm's advisers have suggested a 20-year bond offering with warrants. According to the advisers, Storm could issue 9% annual coupon-bearing debt with 20 warrants per $1,300 face value bond. Storm has 10 million shares of stock outstanding at a current price of $30. The warrants can be exercised in 10 years (on December 31, 2025) at an exercise price of $35. Each warrant entitles its holder to buy one share of Storm Software stock. After issuing the bonds with warrants, Storm's operations and investments are expected to grow at a constant rate of 10.6% per year.
A. If investors pay $1,300 for each bond, what is the value of each warrant attached to the bond issue? Round your answer to the nearest cent. $
B. What is the component cost of these bonds with warrants? Round your answer to two decimal places. %
C. What premium is associated with the warrants? Round your answer to two decimal places. %
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started