Warrants

Pogue Industries Inc. has warrants outstanding that permit its holders to purchase 1 share of stock per warrant at a price of $18. (Refer to Chapter 18 for parts a, b, and c.)

1. Calculate the exercise value of Pogue's warrants if the common stock sells at each of the prices given below. Round your answers to two decimal places.

   Ps	Exercise value
   $18	$
   $21	$
   $25	$
   $70	$

2. At what approximate price do you think the warrants would actually sell under each condition given below? Round your answers to two decimal places.

   Ps	Warrant	Premium
   $18	$	$4.50
   $21	$	$3.00
   $25	$	$1.50
   $70	$	$1.00

3. How would each of the following factors affect your estimates of the warrants' prices and premiums in the previous part?
   1. The life of the warrant is lengthened.

• The expected variability (_p) in the stock's price decreases.
• The expected growth rate in the stock's EPS increases.
• The company announces the following change in dividend policy: Whereas it formerly paid no dividends, henceforth it will pay out all earnings as dividends.

2. Assume that Pogue's stock now sells for $18 per share. The company wants to sell some 20-year, annual interest, $1,000 par value bonds. Each bond will have 75 warrants, each warrant entitles the holder to buy 1 share of stock at a price of $21. Pogue's pure bonds yield 10%. Assume that the warrants will have a market value of $2.00 when the stock sells at $18. What annual dollar coupon must the company set on the bonds with warrants if they are to clear the market (i.e., the market is in equilibrium)? Round your answer to the nearest cent. $ What annual coupon interest rate must the company set on the bonds with warrants if they are to clear the market (i.e., the market is in equilibrium)? Round your answer to two decimal places. %