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 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm's straight bonds yield 10%. Each warrant is expected to have a market value of $2.00 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?
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
- 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 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm's straight bonds yield 10%. Each warrant is expected to have a market value of $2.00 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?
|
a. |
7.83% |
|
|
b. |
8.24% |
|
|
c. |
9.54% |
|
|
d. |
9.08% |
|
|
e. |
8.65% |
QUESTIONS REGARDING SOLUTION IN PHOTO:
1. Where does 0.05 come from?
2. How do you get to the 40th power?
3. When calculating the coupon, where does 1.05 come from?
4. How do you go from coupon to coupon rate?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
