WARRANTS Potter Industries Inc. has warrants outstanding that permit its holders purchase 1 share of stock per warrant at a price of $18. (Refer to Chapter 18 for par a, b, and c.) a. Calculate the exercise value of Potter's warrants if the common stock sells at each of the following prices: $18, $21, $25, and $70. b. At what approximate price do you think the warrants would sell under each condition indicated in part a? What premium is implied in your price? Your answer will be a guess, but your prices and premiums should bear reasonable relationships to each other. c. How would each of the following factors affect your estimates of the warrants' prices and premiums in part b? 1. The life of the warrant is lengthened. 2. The expected variability (o,) in the stock's price decreases. 3. The expected growth rate in the stock's EPS increases.
WARRANTS Potter Industries Inc. has warrants outstanding that permit its holders purchase 1 share of stock per warrant at a price of $18. (Refer to Chapter 18 for par a, b, and c.) a. Calculate the exercise value of Potter's warrants if the common stock sells at each of the following prices: $18, $21, $25, and $70. b. At what approximate price do you think the warrants would sell under each condition indicated in part a? What premium is implied in your price? Your answer will be a guess, but your prices and premiums should bear reasonable relationships to each other. c. How would each of the following factors affect your estimates of the warrants' prices and premiums in part b? 1. The life of the warrant is lengthened. 2. The expected variability (o,) in the stock's price decreases. 3. The expected growth rate in the stock's EPS increases.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Hybrid Financing
Warrants
Transcribed Image Text:20-6
WARRANTS Potter Industries Inc. has warrants outstanding that permit its holders to
purchase 1 share of stock per warrant at a price of $18. (Refer to Chapter 18 for parts
a, b, and c.)
a. Calculate the exercise value of Potter's warrants if the common stock sells at each of
the following prices: $18, $21, $25, and $70.
b. At what approximate price do you think the warrants would sell under each condition
indicated in part a? What premium is implied in your price? Your answer will be a
guess, but your prices and premiums should bear reasonable relationships to each
other.
c. How would each of the following factors affect your estimates of the warrants' prices
and premiums in part b?
1. The life of the warrant is lengthened.
2. The expected variability (o) in the stock's price decreases.
3. The expected growth rate in the stock's EPS increases.
Transcribed Image Text:Financial Management
4. The company announces the following change in dividend policy: Whereas it for-
merly paid no dividends, henceforth it will pay out all earnings as dividends.
d. Assume that Potter's stock now sells for $18 per share. The company wants to sell
some 20-year, annual interest, $1,000 par value bonds. Each bond will have 25 war-
rants, and each warrant entitles the holder to buy 1 share of stock at a price of $21.
Potter's straight debt yields 10%. Regardless of your answer to part b, assume that the
warrants will have a market value of $1.75 when the stock sells at $18. What annual
coupon interest rate and annual dollar coupon must the company set on the bonds
with warrants if the bonds are to clear the market (i.e., the market is in equilibrium)?
Round to the nearest dollar or percentage point.
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