2014-06-27_175613_140628_warrants.docx - (TCO F Warren...

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(TCO F) Warren Corporation’s stock sells for $42/share. The company wants to sell some 20-year annual interest, $1000 par value bonds. Each bond would have 75 warrants attached to it, each exercisable into 1 share of stock at an exercise price of $47. The firm’s straight bonds yield 10%. each warrant is expected to have a market value of $2.00 given that the stock sells for $42. What coupon interest amount must the company set on the bonds in order to sell the bonds-with–warrants at par? a) 7.83% b) 8.24% c) 8.65% d) 9.08% e) 9.54% Solution: Total value = Straight-debt value + Warrant value $1,000 = V + (75 * $2.00) V = $850 Enter N = 20, I = 10; PV =-850; FV = 1,000; and then solve for PMT. PMT = INT = $82.38; Coupon rate = $82.38/$1,000 = 8.24% (TCO E) Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 10% and the loan would be amortized over the truck’s 4-year life. The loan payments would be
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