Warrants

Pogue Industries Inc. has warrants outstanding that permit its holders to purchase 1 share of stock per warrant at a price of $27. (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	$	$9.50
   $21	$	$7.00
   $25	$	$3.50
   $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. -Select-The life of the warrant has no effect on its value.The longer the life, the higher the warrant value.The longer the life, the lower the warrant value.Item 9
   2. The expected variability (_p) in the stock's price decreases. -Select-The less variable the stock price, the lower the warrant value.The less variable the stock price, the higher the warrant value.The variability of the stock price has no effect on the value of the warrants.Item 10
   3. The expected growth rate in the stock's EPS increases. -Select-The higher the expected EPS growth rate, the higher the warrant price.The higher the expected EPS growth rate, the lower the warrant price.The expected EPS growth rate has no effect on the value of the warrants.Item 11
   4. The company announces the following change in dividend policy: Whereas it formerly paid no dividends, henceforth it will pay out all earnings as dividends. -Select-The lower the expected value of the warrant, the lower the premium and the price of the warrant.The higher the expected value of the warrant, the lower the premium and the price of the warrant.The higher the expected value of the warrant, the higher the premium and the price of the warrant.Item 12
4. 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 100 warrants, each warrant entitles the holder to buy 1 share of stock at a price of $21. Pogue's pure bonds yield 9%. Assume that the warrants will have a market value of $1.50 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. %