This preview shows page 1. Sign up to view the full content.
Unformatted text preview: sed during this period. Once the better debt financing alternative was
found, Denise planned to use lease-versus-purchase analysis to evaluate it in
light of the lease alternative. The firm is in the 40% bracket, and its after-tax
cost of debt would be 7% under the debt alternative and 6% under the debt
with warrants. Required
a. Under the debt with warrants, find the following:
(1) Straight debt value.
(2) Implied price of all warrants.
(3) Implied price of each warrant.
(4) Theoretical value of a warrant.
b. On the basis of your findings in part a, do you think the price of the debt
with warrants is too high or too low? Explain.
c. Assuming that the firm can raise the needed funds under the specified terms,
which debt financing alternative—debt or debt with warrants—would you
recommend in view of your findings above? Explain.
d. For the purchase alternative, financed as recommended in part c, calculate
(1) The annual interest expense deductible for tax purposes for each of the
next 3 years.
(2) The after-tax cash outflow for each of the next 3 years.
View Full Document
This document was uploaded on 01/19/2014.
- Fall '13