Preissle Company, wants to sell some 20-year, annual interest, $1,000 par value
ID: 2640889 • Letter: P
Question
Preissle Company, wants to sell some 20-year, annual interest, $1,000 par value bonds. Its stock sells for $42 per share, and each bond would have 25 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm's straight bonds yeild 10%. Each warrant is expected to have a market value of $5.00 given that the stock sells for $42. What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par?
Please Show Work
Explanation / Answer
step1:
find warrant value
warrant value = number of warrants * market value of each warrant
= 75 * 5 = 375
step2:
find straight debt value
total debt value = straight debt value + warrants value
=>
straight debt value = 1000 - 375 = 625
this the debt bond value
step3:
bond value = Present value of coupon payments + present value of face value
let C be the coupon payment per period
=>
625 = C *[1-(1+10%)^-20]/10% + 1000/(1+10%)^20
=>
C = 55.95264
step4:
calculate coupon rate
coupon rate = C/facevalue * 100%
= 55.95264/1000 * 100
= 5.595% or 5.60% .........................ans