Concept explainers
a)
To calculate: The exercise value of the warrant at different stock prices
a)
Explanation of Solution
(1)
Formula to calculate exercise price:
Substitute $20 for current price and $25 for strike price to calculate the exercise price.
Calculation of exercise price:
Exercise price cannot be negative therefore; the exercise price is $0
(2)
Formula to calculate exercise price:
Substitute $25 for current price and $25 for strike price to calculate the exercise price.
Calculation of exercise price:
Therefore; the exercise price is $0
(3)
Formula to calculate exercise price:
Substitute $30 for current price and $25 for strike price to calculate the exercise price.
Calculation of exercise price:
Therefore; the exercise price is $5
(4)
Formula to calculate exercise price:
Substitute $100 for current price and $25 for strike price to calculate the exercise price.
Calculation of exercise price:
Therefore; the exercise price is $75
b)
To calculate: The coupon rate and interest amount in dollars attached to the bonds
b)
Explanation of Solution
Formula to calculate
Substitute $1,000 for value of bonds with warrants and number of warrants, 50 and price per warrant $3 to calculate the value of warrants in order to calculate the value of straight bonds.
Calculation of value of straight bonds:
Formula to calculate coupon interest amount:
Substitute $850 for value of straight bonds, 7.4694 for the value of PVIFA at 12% rate for 20 years, $1,000 for value of stock with warrants and 0.1037 for the value of PVIF at 12% rate for 20 years to calculate the coupon interest amount.
Calculation of coupon interest amount:
Therefore, the coupon rate is 9.91% and coupon amount is $9.91 on each bond.
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Chapter 20 Solutions
Intermediate Financial Management (MindTap Course List)
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