The exercise value of Company PII’s warrants if the common stock sells at $18, $21, $25 and $70. Introduction: A warrant is securities that give the bondholder the right, yet not the obligation, to purchase a specific number of securities at a specific cost before a specific time. Warrants are not the equivalent as the call options or purchase rights of the stock.

Question

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Answer 1

Question

Chapter 20, Problem 6P

a.

Summary Introduction

To Determine: The exercise value of Company PII’s warrants if the common stock sells at $18, $21, $25 and $70.

Introduction: A warrant is securities that give the bondholder the right, yet not the obligation, to purchase a specific number of securities at a specific cost before a specific time. Warrants are not the equivalent as the call options or purchase rights of the stock.

a.

Expert Solution

Answer to Problem 6P

The exercise value of Company PII’s warrants if the common stock sells at $18 is -$3, $21 is $0, $25 is $4 and $70 is $49.

Explanation of Solution

Determine the exercise value of company PII’s warrants

If the common stock sells at $18

Exercise PriceIf Stock Price is $18=[Current Price−Strike Price]=[$18−$21]=−$3

If the common stock sells at $21

Exercise PriceIf Stock Price is $21=[Current Price−Strike Price]=[$21−$21]=$0

If the common stock sells at $25

Exercise PriceIf Stock Price is $25=[Current Price−Strike Price]=[$25−$21]=$4

If the common stock sells at $70

Exercise PriceIf Stock Price is $70=[Current Price−Strike Price]=[$70−$21]=$49

Therefore the exercise value of Company PII’s warrants if the common stock sells at $18 is -$3, $21 is $0, $25 is $4 and $70 is $49.

b.

Summary Introduction

To Determine: The approximate price and the premium implied the warrants to sell under each condition from part (a) based on guess or reasonable assumption.

b.

Expert Solution

Explanation of Solution

Determine the approximate price, premium and warrant for each stock

Since there is no exact or approximate solutions are possible the below are the price, premium and warrant for each stock price which are purely based on reasonable assumption.

If the common stock sells at $18:

The approximate price will be $18, the premium will be $4.50 and the warrant will be $1.50.

If the common stock sells at $21:

The approximate price will be $21, the premium will be $3 and the warrant will be $3.

If the common stock sells at $25

The approximate price will be $25, the premium will be $1.50 and the warrant will be $5.50.

If the common stock sells at $70:

The approximate price will be $70, the premium will be $1 and the warrant will be $50.

c1.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the life of warrant in lengthened.

c1.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the life of warrant in lengthened is as follows:

The higher the value of warrant, the lengthier the life of the warrant.

c2.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the expected variability in stock's price decrease.

c2.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the expected variability in stock's price decrease is as follows:

The lesser the value of warrant, the lesser the variable of the stock price.

c3.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the growth rate in the stock's EPS increase.

c3.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the growth rate in the stock's EPS increase is as follows:

The greater the price of warrant, the greater the expected EPS growth rate.

c4.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the company paid no dividends and will pay out all earnings as dividends.

c4.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the company paid no dividends and will pay out all earnings as dividends is as follows:

Beginning from 0 to 100% payout would have two conceivable impacts. To start with, it may influence the price of stock creating an variation in the exercise value of the warrant, nonetheless, it is not certain that the price of stock would change, not to mention what the variations possible.

The expansion in the payout ratio would significantly bring down the expected growth rate. This would decrease the probability of the stock's cost expanding in the future. This would bring down the expected value of the warrant, consequently bring down the premium and the cost of the warrant.

d.

Summary Introduction

To Determine: The annual coupon interest rate and annual dollar coupon on the bonds.

d.

Expert Solution

Answer to Problem 6P

The annual coupon interest rate is 9.11% and annual dollar coupon on the bonds is $91.19.

Explanation of Solution

Determine the value of bond

Value of Bond=[Face Value−(Value of Warrant×Number of Warrants)]=[$1,000−($1.50×50)]=[$1,000−$75]=$925

Therefore the value of bond is $925.

Determine the annual dollar coupon on the bonds

Using an excel spreadsheet and excel function =PMT, the annual dollar coupon on the bonds is calculated as $91.19.

Excel Spreadsheet:

Fundamentals of Financial Management (MindTap Course List), Chapter 20, Problem 6P

Therefore the annual dollar coupon on the bonds is $91.19

Determine the annual coupon interest rate on the bonds

Annual Coupon Rate=[Coupon PaymentFace Value]=[$91.19$1,000]=0.09119 or 9.11%

Therefore the annual coupon interest rate on the bonds is 9.11%.

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Answer 2

Question

Chapter 20, Problem 6P

a.

Summary Introduction

To Determine: The exercise value of Company PII’s warrants if the common stock sells at $18, $21, $25 and $70.

Introduction: A warrant is securities that give the bondholder the right, yet not the obligation, to purchase a specific number of securities at a specific cost before a specific time. Warrants are not the equivalent as the call options or purchase rights of the stock.

a.

Expert Solution

Answer to Problem 6P

The exercise value of Company PII’s warrants if the common stock sells at $18 is -$3, $21 is $0, $25 is $4 and $70 is $49.

Explanation of Solution

Determine the exercise value of company PII’s warrants

If the common stock sells at $18

Exercise PriceIf Stock Price is $18=[Current Price−Strike Price]=[$18−$21]=−$3

If the common stock sells at $21

Exercise PriceIf Stock Price is $21=[Current Price−Strike Price]=[$21−$21]=$0

If the common stock sells at $25

Exercise PriceIf Stock Price is $25=[Current Price−Strike Price]=[$25−$21]=$4

If the common stock sells at $70

Exercise PriceIf Stock Price is $70=[Current Price−Strike Price]=[$70−$21]=$49

Therefore the exercise value of Company PII’s warrants if the common stock sells at $18 is -$3, $21 is $0, $25 is $4 and $70 is $49.

b.

Summary Introduction

To Determine: The approximate price and the premium implied the warrants to sell under each condition from part (a) based on guess or reasonable assumption.

b.

Expert Solution

Explanation of Solution

Determine the approximate price, premium and warrant for each stock

Since there is no exact or approximate solutions are possible the below are the price, premium and warrant for each stock price which are purely based on reasonable assumption.

If the common stock sells at $18:

The approximate price will be $18, the premium will be $4.50 and the warrant will be $1.50.

If the common stock sells at $21:

The approximate price will be $21, the premium will be $3 and the warrant will be $3.

If the common stock sells at $25

The approximate price will be $25, the premium will be $1.50 and the warrant will be $5.50.

If the common stock sells at $70:

The approximate price will be $70, the premium will be $1 and the warrant will be $50.

c1.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the life of warrant in lengthened.

c1.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the life of warrant in lengthened is as follows:

The higher the value of warrant, the lengthier the life of the warrant.

c2.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the expected variability in stock's price decrease.

c2.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the expected variability in stock's price decrease is as follows:

The lesser the value of warrant, the lesser the variable of the stock price.

c3.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the growth rate in the stock's EPS increase.

c3.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the growth rate in the stock's EPS increase is as follows:

The greater the price of warrant, the greater the expected EPS growth rate.

c4.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the company paid no dividends and will pay out all earnings as dividends.

c4.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the company paid no dividends and will pay out all earnings as dividends is as follows:

Beginning from 0 to 100% payout would have two conceivable impacts. To start with, it may influence the price of stock creating an variation in the exercise value of the warrant, nonetheless, it is not certain that the price of stock would change, not to mention what the variations possible.

The expansion in the payout ratio would significantly bring down the expected growth rate. This would decrease the probability of the stock's cost expanding in the future. This would bring down the expected value of the warrant, consequently bring down the premium and the cost of the warrant.

d.

Summary Introduction

To Determine: The annual coupon interest rate and annual dollar coupon on the bonds.

d.

Expert Solution

Answer to Problem 6P

The annual coupon interest rate is 9.11% and annual dollar coupon on the bonds is $91.19.

Explanation of Solution

Determine the value of bond

Value of Bond=[Face Value−(Value of Warrant×Number of Warrants)]=[$1,000−($1.50×50)]=[$1,000−$75]=$925

Therefore the value of bond is $925.

Determine the annual dollar coupon on the bonds

Using an excel spreadsheet and excel function =PMT, the annual dollar coupon on the bonds is calculated as $91.19.

Excel Spreadsheet:

Fundamentals of Financial Management (MindTap Course List), Chapter 20, Problem 6P

Therefore the annual dollar coupon on the bonds is $91.19

Determine the annual coupon interest rate on the bonds

Annual Coupon Rate=[Coupon PaymentFace Value]=[$91.19$1,000]=0.09119 or 9.11%

Therefore the annual coupon interest rate on the bonds is 9.11%.

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Answer 3

Question

Chapter 20, Problem 6P

a.

Summary Introduction

To Determine: The exercise value of Company PII’s warrants if the common stock sells at $18, $21, $25 and $70.

Introduction: A warrant is securities that give the bondholder the right, yet not the obligation, to purchase a specific number of securities at a specific cost before a specific time. Warrants are not the equivalent as the call options or purchase rights of the stock.

a.

Expert Solution

Answer to Problem 6P

The exercise value of Company PII’s warrants if the common stock sells at $18 is -$3, $21 is $0, $25 is $4 and $70 is $49.

Explanation of Solution

Determine the exercise value of company PII’s warrants

If the common stock sells at $18

Exercise PriceIf Stock Price is $18=[Current Price−Strike Price]=[$18−$21]=−$3

If the common stock sells at $21

Exercise PriceIf Stock Price is $21=[Current Price−Strike Price]=[$21−$21]=$0

If the common stock sells at $25

Exercise PriceIf Stock Price is $25=[Current Price−Strike Price]=[$25−$21]=$4

If the common stock sells at $70

Exercise PriceIf Stock Price is $70=[Current Price−Strike Price]=[$70−$21]=$49

Therefore the exercise value of Company PII’s warrants if the common stock sells at $18 is -$3, $21 is $0, $25 is $4 and $70 is $49.

b.

Summary Introduction

To Determine: The approximate price and the premium implied the warrants to sell under each condition from part (a) based on guess or reasonable assumption.

b.

Expert Solution

Explanation of Solution

Determine the approximate price, premium and warrant for each stock

Since there is no exact or approximate solutions are possible the below are the price, premium and warrant for each stock price which are purely based on reasonable assumption.

If the common stock sells at $18:

The approximate price will be $18, the premium will be $4.50 and the warrant will be $1.50.

If the common stock sells at $21:

The approximate price will be $21, the premium will be $3 and the warrant will be $3.

If the common stock sells at $25

The approximate price will be $25, the premium will be $1.50 and the warrant will be $5.50.

If the common stock sells at $70:

The approximate price will be $70, the premium will be $1 and the warrant will be $50.

c1.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the life of warrant in lengthened.

c1.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the life of warrant in lengthened is as follows:

The higher the value of warrant, the lengthier the life of the warrant.

c2.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the expected variability in stock's price decrease.

c2.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the expected variability in stock's price decrease is as follows:

The lesser the value of warrant, the lesser the variable of the stock price.

c3.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the growth rate in the stock's EPS increase.

c3.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the growth rate in the stock's EPS increase is as follows:

The greater the price of warrant, the greater the expected EPS growth rate.

c4.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the company paid no dividends and will pay out all earnings as dividends.

c4.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the company paid no dividends and will pay out all earnings as dividends is as follows:

Beginning from 0 to 100% payout would have two conceivable impacts. To start with, it may influence the price of stock creating an variation in the exercise value of the warrant, nonetheless, it is not certain that the price of stock would change, not to mention what the variations possible.

The expansion in the payout ratio would significantly bring down the expected growth rate. This would decrease the probability of the stock's cost expanding in the future. This would bring down the expected value of the warrant, consequently bring down the premium and the cost of the warrant.

d.

Summary Introduction

To Determine: The annual coupon interest rate and annual dollar coupon on the bonds.

d.

Expert Solution

Answer to Problem 6P

The annual coupon interest rate is 9.11% and annual dollar coupon on the bonds is $91.19.

Explanation of Solution

Determine the value of bond

Value of Bond=[Face Value−(Value of Warrant×Number of Warrants)]=[$1,000−($1.50×50)]=[$1,000−$75]=$925

Therefore the value of bond is $925.

Determine the annual dollar coupon on the bonds

Using an excel spreadsheet and excel function =PMT, the annual dollar coupon on the bonds is calculated as $91.19.

Excel Spreadsheet:

Fundamentals of Financial Management (MindTap Course List), Chapter 20, Problem 6P

Therefore the annual dollar coupon on the bonds is $91.19

Determine the annual coupon interest rate on the bonds

Annual Coupon Rate=[Coupon PaymentFace Value]=[$91.19$1,000]=0.09119 or 9.11%

Therefore the annual coupon interest rate on the bonds is 9.11%.

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Answer 4

Question

Chapter 20, Problem 6P

a.

Summary Introduction

To Determine: The exercise value of Company PII’s warrants if the common stock sells at $18, $21, $25 and $70.

Introduction: A warrant is securities that give the bondholder the right, yet not the obligation, to purchase a specific number of securities at a specific cost before a specific time. Warrants are not the equivalent as the call options or purchase rights of the stock.

a.

Expert Solution

Answer to Problem 6P

The exercise value of Company PII’s warrants if the common stock sells at $18 is -$3, $21 is $0, $25 is $4 and $70 is $49.

Explanation of Solution

Determine the exercise value of company PII’s warrants

If the common stock sells at $18

Exercise PriceIf Stock Price is $18=[Current Price−Strike Price]=[$18−$21]=−$3

If the common stock sells at $21

Exercise PriceIf Stock Price is $21=[Current Price−Strike Price]=[$21−$21]=$0

If the common stock sells at $25

Exercise PriceIf Stock Price is $25=[Current Price−Strike Price]=[$25−$21]=$4

If the common stock sells at $70

Exercise PriceIf Stock Price is $70=[Current Price−Strike Price]=[$70−$21]=$49

Therefore the exercise value of Company PII’s warrants if the common stock sells at $18 is -$3, $21 is $0, $25 is $4 and $70 is $49.

b.

Summary Introduction

To Determine: The approximate price and the premium implied the warrants to sell under each condition from part (a) based on guess or reasonable assumption.

b.

Expert Solution

Explanation of Solution

Determine the approximate price, premium and warrant for each stock

Since there is no exact or approximate solutions are possible the below are the price, premium and warrant for each stock price which are purely based on reasonable assumption.

If the common stock sells at $18:

The approximate price will be $18, the premium will be $4.50 and the warrant will be $1.50.

If the common stock sells at $21:

The approximate price will be $21, the premium will be $3 and the warrant will be $3.

If the common stock sells at $25

The approximate price will be $25, the premium will be $1.50 and the warrant will be $5.50.

If the common stock sells at $70:

The approximate price will be $70, the premium will be $1 and the warrant will be $50.

c1.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the life of warrant in lengthened.

c1.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the life of warrant in lengthened is as follows:

The higher the value of warrant, the lengthier the life of the warrant.

c2.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the expected variability in stock's price decrease.

c2.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the expected variability in stock's price decrease is as follows:

The lesser the value of warrant, the lesser the variable of the stock price.

c3.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the growth rate in the stock's EPS increase.

c3.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the growth rate in the stock's EPS increase is as follows:

The greater the price of warrant, the greater the expected EPS growth rate.

c4.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the company paid no dividends and will pay out all earnings as dividends.

c4.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the company paid no dividends and will pay out all earnings as dividends is as follows:

Beginning from 0 to 100% payout would have two conceivable impacts. To start with, it may influence the price of stock creating an variation in the exercise value of the warrant, nonetheless, it is not certain that the price of stock would change, not to mention what the variations possible.

The expansion in the payout ratio would significantly bring down the expected growth rate. This would decrease the probability of the stock's cost expanding in the future. This would bring down the expected value of the warrant, consequently bring down the premium and the cost of the warrant.

d.

Summary Introduction

To Determine: The annual coupon interest rate and annual dollar coupon on the bonds.

d.

Expert Solution

Answer to Problem 6P

The annual coupon interest rate is 9.11% and annual dollar coupon on the bonds is $91.19.

Explanation of Solution

Determine the value of bond

Value of Bond=[Face Value−(Value of Warrant×Number of Warrants)]=[$1,000−($1.50×50)]=[$1,000−$75]=$925

Therefore the value of bond is $925.

Determine the annual dollar coupon on the bonds

Using an excel spreadsheet and excel function =PMT, the annual dollar coupon on the bonds is calculated as $91.19.

Excel Spreadsheet:

Fundamentals of Financial Management (MindTap Course List), Chapter 20, Problem 6P

Therefore the annual dollar coupon on the bonds is $91.19

Determine the annual coupon interest rate on the bonds

Annual Coupon Rate=[Coupon PaymentFace Value]=[$91.19$1,000]=0.09119 or 9.11%

Therefore the annual coupon interest rate on the bonds is 9.11%.

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Answer 5

Chapter 20, Problem 6P

a.

Summary Introduction

To Determine: The exercise value of Company PII’s warrants if the common stock sells at $18, $21, $25 and $70.

Introduction: A warrant is securities that give the bondholder the right, yet not the obligation, to purchase a specific number of securities at a specific cost before a specific time. Warrants are not the equivalent as the call options or purchase rights of the stock.

a.

Expert Solution

Answer to Problem 6P

The exercise value of Company PII’s warrants if the common stock sells at $18 is -$3, $21 is $0, $25 is $4 and $70 is $49.

Explanation of Solution

Determine the exercise value of company PII’s warrants

If the common stock sells at $18

Exercise PriceIf Stock Price is $18=[Current Price−Strike Price]=[$18−$21]=−$3

If the common stock sells at $21

Exercise PriceIf Stock Price is $21=[Current Price−Strike Price]=[$21−$21]=$0

If the common stock sells at $25

Exercise PriceIf Stock Price is $25=[Current Price−Strike Price]=[$25−$21]=$4

If the common stock sells at $70

Exercise PriceIf Stock Price is $70=[Current Price−Strike Price]=[$70−$21]=$49

Therefore the exercise value of Company PII’s warrants if the common stock sells at $18 is -$3, $21 is $0, $25 is $4 and $70 is $49.

b.

Summary Introduction

To Determine: The approximate price and the premium implied the warrants to sell under each condition from part (a) based on guess or reasonable assumption.

b.

Expert Solution

Explanation of Solution

Determine the approximate price, premium and warrant for each stock

Since there is no exact or approximate solutions are possible the below are the price, premium and warrant for each stock price which are purely based on reasonable assumption.

If the common stock sells at $18:

The approximate price will be $18, the premium will be $4.50 and the warrant will be $1.50.

If the common stock sells at $21:

The approximate price will be $21, the premium will be $3 and the warrant will be $3.

If the common stock sells at $25

The approximate price will be $25, the premium will be $1.50 and the warrant will be $5.50.

If the common stock sells at $70:

The approximate price will be $70, the premium will be $1 and the warrant will be $50.

c1.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the life of warrant in lengthened.

c1.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the life of warrant in lengthened is as follows:

The higher the value of warrant, the lengthier the life of the warrant.

c2.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the expected variability in stock's price decrease.

c2.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the expected variability in stock's price decrease is as follows:

The lesser the value of warrant, the lesser the variable of the stock price.

c3.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the growth rate in the stock's EPS increase.

c3.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the growth rate in the stock's EPS increase is as follows:

The greater the price of warrant, the greater the expected EPS growth rate.

c4.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the company paid no dividends and will pay out all earnings as dividends.

c4.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the company paid no dividends and will pay out all earnings as dividends is as follows:

Beginning from 0 to 100% payout would have two conceivable impacts. To start with, it may influence the price of stock creating an variation in the exercise value of the warrant, nonetheless, it is not certain that the price of stock would change, not to mention what the variations possible.

The expansion in the payout ratio would significantly bring down the expected growth rate. This would decrease the probability of the stock's cost expanding in the future. This would bring down the expected value of the warrant, consequently bring down the premium and the cost of the warrant.

d.

Summary Introduction

To Determine: The annual coupon interest rate and annual dollar coupon on the bonds.

d.

Expert Solution

Answer to Problem 6P

The annual coupon interest rate is 9.11% and annual dollar coupon on the bonds is $91.19.

Explanation of Solution

Determine the value of bond

Value of Bond=[Face Value−(Value of Warrant×Number of Warrants)]=[$1,000−($1.50×50)]=[$1,000−$75]=$925

Therefore the value of bond is $925.

Determine the annual dollar coupon on the bonds

Using an excel spreadsheet and excel function =PMT, the annual dollar coupon on the bonds is calculated as $91.19.

Excel Spreadsheet:

Fundamentals of Financial Management (MindTap Course List), Chapter 20, Problem 6P

Therefore the annual dollar coupon on the bonds is $91.19

Determine the annual coupon interest rate on the bonds

Annual Coupon Rate=[Coupon PaymentFace Value]=[$91.19$1,000]=0.09119 or 9.11%

Therefore the annual coupon interest rate on the bonds is 9.11%.

Answer 6

Chapter 20, Problem 6P

a.

Summary Introduction

To Determine: The exercise value of Company PII’s warrants if the common stock sells at $18, $21, $25 and $70.

Introduction: A warrant is securities that give the bondholder the right, yet not the obligation, to purchase a specific number of securities at a specific cost before a specific time. Warrants are not the equivalent as the call options or purchase rights of the stock.

a.

Expert Solution

Answer to Problem 6P

The exercise value of Company PII’s warrants if the common stock sells at $18 is -$3, $21 is $0, $25 is $4 and $70 is $49.

Explanation of Solution

Determine the exercise value of company PII’s warrants

If the common stock sells at $18

Exercise PriceIf Stock Price is $18=[Current Price−Strike Price]=[$18−$21]=−$3

If the common stock sells at $21

Exercise PriceIf Stock Price is $21=[Current Price−Strike Price]=[$21−$21]=$0

If the common stock sells at $25

Exercise PriceIf Stock Price is $25=[Current Price−Strike Price]=[$25−$21]=$4

If the common stock sells at $70

Exercise PriceIf Stock Price is $70=[Current Price−Strike Price]=[$70−$21]=$49

Therefore the exercise value of Company PII’s warrants if the common stock sells at $18 is -$3, $21 is $0, $25 is $4 and $70 is $49.

Answer 7

Chapter 20, Problem 6P

a.

Summary Introduction

To Determine: The exercise value of Company PII’s warrants if the common stock sells at $18, $21, $25 and $70.

Introduction: A warrant is securities that give the bondholder the right, yet not the obligation, to purchase a specific number of securities at a specific cost before a specific time. Warrants are not the equivalent as the call options or purchase rights of the stock.

Answer 8

a.

Expert Solution

Answer to Problem 6P

The exercise value of Company PII’s warrants if the common stock sells at $18 is -$3, $21 is $0, $25 is $4 and $70 is $49.

Answer 9

a.

Expert Solution

Answer 10

a.

Expert Solution

Answer 11

Expert Solution

Answer 12

Explanation of Solution

Determine the exercise value of company PII’s warrants

If the common stock sells at $18

Exercise PriceIf Stock Price is $18=[Current Price−Strike Price]=[$18−$21]=−$3

If the common stock sells at $21

Exercise PriceIf Stock Price is $21=[Current Price−Strike Price]=[$21−$21]=$0

If the common stock sells at $25

Exercise PriceIf Stock Price is $25=[Current Price−Strike Price]=[$25−$21]=$4

If the common stock sells at $70

Exercise PriceIf Stock Price is $70=[Current Price−Strike Price]=[$70−$21]=$49

Therefore the exercise value of Company PII’s warrants if the common stock sells at $18 is -$3, $21 is $0, $25 is $4 and $70 is $49.

Answer 13

b.

Summary Introduction

To Determine: The approximate price and the premium implied the warrants to sell under each condition from part (a) based on guess or reasonable assumption.

b.

Expert Solution

Explanation of Solution

Determine the approximate price, premium and warrant for each stock

Since there is no exact or approximate solutions are possible the below are the price, premium and warrant for each stock price which are purely based on reasonable assumption.

If the common stock sells at $18:

The approximate price will be $18, the premium will be $4.50 and the warrant will be $1.50.

If the common stock sells at $21:

The approximate price will be $21, the premium will be $3 and the warrant will be $3.

If the common stock sells at $25

The approximate price will be $25, the premium will be $1.50 and the warrant will be $5.50.

If the common stock sells at $70:

The approximate price will be $70, the premium will be $1 and the warrant will be $50.

Answer 14

b.

Summary Introduction

To Determine: The approximate price and the premium implied the warrants to sell under each condition from part (a) based on guess or reasonable assumption.

Answer 15

b.

Expert Solution

Explanation of Solution

Determine the approximate price, premium and warrant for each stock

Since there is no exact or approximate solutions are possible the below are the price, premium and warrant for each stock price which are purely based on reasonable assumption.

If the common stock sells at $18:

The approximate price will be $18, the premium will be $4.50 and the warrant will be $1.50.

If the common stock sells at $21:

The approximate price will be $21, the premium will be $3 and the warrant will be $3.

If the common stock sells at $25

The approximate price will be $25, the premium will be $1.50 and the warrant will be $5.50.

If the common stock sells at $70:

The approximate price will be $70, the premium will be $1 and the warrant will be $50.

Answer 16

b.

Expert Solution

Answer 17

b.

Expert Solution

Answer 18

Expert Solution

Answer 19

c1.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the life of warrant in lengthened.

c1.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the life of warrant in lengthened is as follows:

The higher the value of warrant, the lengthier the life of the warrant.

Answer 20

c1.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the life of warrant in lengthened.

Answer 21

c1.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the life of warrant in lengthened is as follows:

The higher the value of warrant, the lengthier the life of the warrant.

Answer 22

c1.

Expert Solution

Answer 23

c1.

Expert Solution

Answer 24

Expert Solution

Answer 25

c2.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the expected variability in stock's price decrease.

c2.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the expected variability in stock's price decrease is as follows:

The lesser the value of warrant, the lesser the variable of the stock price.

Answer 26

c2.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the expected variability in stock's price decrease.

Answer 27

c2.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the expected variability in stock's price decrease is as follows:

The lesser the value of warrant, the lesser the variable of the stock price.

Answer 28

c2.

Expert Solution

Answer 29

c2.

Expert Solution

Answer 30

Expert Solution

Answer 31

c3.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the growth rate in the stock's EPS increase.

c3.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the growth rate in the stock's EPS increase is as follows:

The greater the price of warrant, the greater the expected EPS growth rate.

Answer 32

c3.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the growth rate in the stock's EPS increase.

Answer 33

c3.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the growth rate in the stock's EPS increase is as follows:

The greater the price of warrant, the greater the expected EPS growth rate.

Answer 34

c3.

Expert Solution

Answer 35

c3.

Expert Solution

Answer 36

Expert Solution

Answer 37

c4.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the company paid no dividends and will pay out all earnings as dividends.

c4.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the company paid no dividends and will pay out all earnings as dividends is as follows:

Beginning from 0 to 100% payout would have two conceivable impacts. To start with, it may influence the price of stock creating an variation in the exercise value of the warrant, nonetheless, it is not certain that the price of stock would change, not to mention what the variations possible.

The expansion in the payout ratio would significantly bring down the expected growth rate. This would decrease the probability of the stock's cost expanding in the future. This would bring down the expected value of the warrant, consequently bring down the premium and the cost of the warrant.

Answer 38

c4.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the company paid no dividends and will pay out all earnings as dividends.

Answer 39

c4.

Expert Solution

Explanation of Solution

The factors that affect the estimates of the warrants' prices and premium in part b when the company paid no dividends and will pay out all earnings as dividends is as follows:

Beginning from 0 to 100% payout would have two conceivable impacts. To start with, it may influence the price of stock creating an variation in the exercise value of the warrant, nonetheless, it is not certain that the price of stock would change, not to mention what the variations possible.

The expansion in the payout ratio would significantly bring down the expected growth rate. This would decrease the probability of the stock's cost expanding in the future. This would bring down the expected value of the warrant, consequently bring down the premium and the cost of the warrant.

Answer 40

c4.

Expert Solution

Answer 41

c4.

Expert Solution

Answer 42

Expert Solution

Answer 43

d.

Summary Introduction

To Determine: The annual coupon interest rate and annual dollar coupon on the bonds.

d.

Expert Solution

Answer to Problem 6P

The annual coupon interest rate is 9.11% and annual dollar coupon on the bonds is $91.19.

Explanation of Solution

Determine the value of bond

Value of Bond=[Face Value−(Value of Warrant×Number of Warrants)]=[$1,000−($1.50×50)]=[$1,000−$75]=$925

Therefore the value of bond is $925.

Determine the annual dollar coupon on the bonds

Using an excel spreadsheet and excel function =PMT, the annual dollar coupon on the bonds is calculated as $91.19.

Excel Spreadsheet:

Fundamentals of Financial Management (MindTap Course List), Chapter 20, Problem 6P

Therefore the annual dollar coupon on the bonds is $91.19

Determine the annual coupon interest rate on the bonds

Annual Coupon Rate=[Coupon PaymentFace Value]=[$91.19$1,000]=0.09119 or 9.11%

Therefore the annual coupon interest rate on the bonds is 9.11%.

Answer 44

d.

Summary Introduction

To Determine: The annual coupon interest rate and annual dollar coupon on the bonds.

Answer 45

d.

Expert Solution

Answer to Problem 6P

The annual coupon interest rate is 9.11% and annual dollar coupon on the bonds is $91.19.

Answer 46

d.

Expert Solution

Answer 47

d.

Expert Solution

Answer 48

Expert Solution

Answer 49

Explanation of Solution

Determine the value of bond

Value of Bond=[Face Value−(Value of Warrant×Number of Warrants)]=[$1,000−($1.50×50)]=[$1,000−$75]=$925

Therefore the value of bond is $925.

Determine the annual dollar coupon on the bonds

Using an excel spreadsheet and excel function =PMT, the annual dollar coupon on the bonds is calculated as $91.19.

Excel Spreadsheet:

Fundamentals of Financial Management (MindTap Course List), Chapter 20, Problem 6P

Therefore the annual dollar coupon on the bonds is $91.19

Determine the annual coupon interest rate on the bonds

Annual Coupon Rate=[Coupon PaymentFace Value]=[$91.19$1,000]=0.09119 or 9.11%

Therefore the annual coupon interest rate on the bonds is 9.11%.

Answer 50

Ch. 20 - Prob. 1Q Ch. 20 - You are told that one corporation just issued SI00...Ch. 20 - One often finds that a companys bonds have a...Ch. 20 - Prob. 4Q Ch. 20 - Distinguish between operating leases and financial...Ch. 20 - One alleged advantage of leasing voiced in the...Ch. 20 - Prob. 7Q Ch. 20 - Prob. 8Q Ch. 20 - Prob. 9Q Ch. 20 - Prob. 10Q

Concept explainers

Answer to Problem 6P

Explanation of Solution

To Determine: The approximate price and the premium implied the warrants to sell under each condition from part (a) based on guess or reasonable assumption.

Explanation of Solution

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the life of warrant in lengthened.

Explanation of Solution

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the expected variability in stock's price decrease.

Explanation of Solution

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the growth rate in the stock's EPS increase.

Explanation of Solution

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the company paid no dividends and will pay out all earnings as dividends.

Explanation of Solution

To Determine: The annual coupon interest rate and annual dollar coupon on the bonds.

Answer to Problem 6P

Explanation of Solution

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