Dinoo Mathur wishes to determine whether the $1,000 price asked for Stanco Manufacturing's bond is fair in light of the theoretical value of the attached warrants. The $1,000-par-value, 30-year, 11.6%-coupon-interest-rate bond pays annual interest and has 10 warrants attached for purchase of common stock. The intrinsic value of each warrant is $12.18. The interest rate on an equal-risk straight bond is currently 12.8%. a. Find the straight value of Stanco Manufacturing's bond. b. Calculate the implied price of all warrants attached to Stanco's bond. c. Calculate the implied price of each warrant attached to Stanco's bond. d. Compare the implied price for each warrant calculated in part c to its intrinsic value. On the basis of this comparison, what assessment would you give Dinoo with respect to the fairness of Stanco's bond price? Explain.
Dinoo Mathur wishes to determine whether the $1,000 price asked for Stanco Manufacturing's bond is fair in light of the theoretical value of the attached warrants. The $1,000-par-value, 30-year, 11.6%-coupon-interest-rate bond pays annual interest and has 10 warrants attached for purchase of common stock. The intrinsic value of each warrant is $12.18. The interest rate on an equal-risk straight bond is currently 12.8%. a. Find the straight value of Stanco Manufacturing's bond. b. Calculate the implied price of all warrants attached to Stanco's bond. c. Calculate the implied price of each warrant attached to Stanco's bond. d. Compare the implied price for each warrant calculated in part c to its intrinsic value. On the basis of this comparison, what assessment would you give Dinoo with respect to the fairness of Stanco's bond price? Explain.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Dinoo Mathur wishes to determine whether the $1,000 price asked for Stanco Manufacturing's bond is fair in light of the theoretical value of the attached warrants. The $1,000-par-value, 30-year, 11.6%-coupon-interest-rate bond pays annual interest and has 10 warrants attached for purchase of common stock. The intrinsic value of each warrant is $12.18. The interest rate on an equal-risk straight bond is currently 12.8%.
a. Find the straight value of Stanco Manufacturing's bond.
b. Calculate the implied price of all warrants attached to Stanco's bond.
c. Calculate the implied price of each warrant attached to Stanco's bond.
d. Compare the implied price for each warrant calculated in part c to its intrinsic value. On the basis of this comparison, what assessment would you give Dinoo with respect to the fairness of Stanco's bond price? Explain.
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