Masse Industries Inc. has warrants outstanding that permit the holders to purcha
ID: 2778679 • Letter: M
Question
Masse Industries Inc. has warrants outstanding that permit the holders to purchase 1 share of stock per warrant at a price of $26. Calculate the exercise value of the firms warrants if the common sells at each of the following prices: (1) $20, (2) $25, (3) $30, (4) $100. Assume the firms stock now sells for $20 per share. The company wants to sell some 20-year, $1,000 par value bonds with interest paid annually. Each bond will have attached 100 warrants, each exercisable Into 1 share of stock at an exercise price of $25. The firms straight bonds yield 11%. Assume that each warrant will have a market value of $3.25 when the stock sells at $20. What coupon interest rate must the company set on the bonds with warrants if they are to clear the market? What dollar coupon must the company set on the bonds with warrants if they are to clear the market?Explanation / Answer
Current Value of Bond with warrant = 1000
Excerrcise value per warrant = max{0,(Price -Excercise price)}
Excerrcise value per warrant = max{0,(20-25)}
Excerrcise value per warrant = 0
Current value of Warrent in Bond = min { Market Value , Excerrcise value per warrant}*100
Current value of Warrent in Bond = min{3.25,0}*100
Current value of Warrent in Bond = 0
Current Value of Bond without warrant = 1000 -0
Current Value of Bond without warrant = $ 1000
Straight Bond Yield rate = 11%
Annual Coupon = pmt(rate,nper,pv,fv)
Annual Coupon = pmt(11%,20,-1000,1000)
Annual Coupon = 110
Coupon Interest Rate = 11%
Dollar Coupon = $ 110