Ch19 - CHAPTER 19 Hybrid Financing preferred stock warrants...

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CHAPTER 19 Hybrid Financing: preferred stock, warrants, and convertibles
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C. C. (5) The warrants have a cost which must be added to the coupon interest cost. If the warrants are exercised in 5 years, then Edusoft would be exchanging stock worth $36.75 for 1 warrant plus $25. The firm would incur an opportunity cost of $36.75 - $25= $11.75 on each warrant, and investors would obtain that amount of profit. The total loss to the company (or profit to the warrant holders) per bond would be $ 587.50 ($11.75*50 warrants). Edusoft must also make the interest payments over the bond’s life, as well as repay the principal after 20 years. The IRR of this cash flow stream, 14.65 %, is the pre-tax cost of the bond-with- warrants issue. This cost is higher than the 12% cost of straight debt, because, from the investors’ standpoint, the issue is riskier than straight debt. It is lower, though, than the cost of equity because part of the return is fixed by contract.
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D. D. (1) Conversion Price= Pc = Par Value/Nb shares received = $1,000/40 = $25 (2) The value of a 10.5% annual coupon bond is $ 887.96
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