Show Work McDaniels Company plans to issue 20-year bonds with annual interest pa
ID: 2796219 • Letter: S
Question
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McDaniels Company plans to issue 20-year bonds with annual interest payments and with 25 warrants attached. The investment banker estimates that each warrant will have a value of $5.00. A similar straight-debt issue would require a 10% coupon. What coupon rate should be set on the bonds-with-warrants so that the package will sell for $1,000?
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McDaniels Company plans to issue 20-year bonds with annual interest payments and with 25 warrants attached. The investment banker estimates that each warrant will have a value of $5.00. A similar straight-debt issue would require a 10% coupon. What coupon rate should be set on the bonds-with-warrants so that the package will sell for $1,000?
Explanation / Answer
Value of package(Vp) = Value of bond(Vb) + Value of Warrents (Vw) Vw = No. of warrents attached x Value of each warrant = 25 x 5 = 125 Vd = V p - Vw = 1000 - 125 = 875 Also Vb = Pv of Cash flows coupon be x Par value 1000 YTM 10% Vd = X x PVAF (10%, 20 years) + 1000 x PVIF(10%, 20 years) 875 = 8.5136x + 1000 x 0.1486 875 = 8.5136x + 148.6436 x = (875-148.6436)/8.5136 x = 726.3564 /8.5136 x = 85.3175 Therefore coupon rate = 85.3175/1000 x 100 = 8.531755 (b) Ans Please provide feedback…. Thanks in advance…… :-)