Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN: 9781337395250
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 20, Problem 12SP
a.
Summary Introduction
To determine: The value of every warrant attached to the bond issue.
Introduction:
A form of long-term option mainly to purchase a specified number of shares at a particular price is termed as a Warrant. It is distributed with debts.
b.
Summary Introduction
To determine: The component cost of the bonds with warrants and the premium related with the cost of warrants.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
BroadStreet Bank has just been given a $10,000,000, 5 year CD deposit
by the local municipality. The bank has agreed to pay 8%, compounded
annually on this deposit. The bank wishes to choose one debt investment to
cover this deposit, so that they have earnings from this investment to just
cover the interest and CD principal when it comes due in 5 years. They are
looking at the following 3 possibilities for investment:
Bond Maturity Coupon YTM Duration1 5 0.00% 8.00% 5.002 6 7.90% 8.00% 5.003 7 17.15% 8.00% 5.00
• Show that each of three investment will cover the future payout required by the CD, even if market rates increase or drop by ½ % by the end of 5 years
Storm Software wants to issue $100 million in new capital to fund newopportunities. If Storm raised the $100 million of new capital in a straight-debt 20-yearbond offering, Storm would have to offer an annual coupon rate of 12%. However, Storm’sadvisers have suggested a 20-year bond offering with warrants. According to the advisers,Storm could issue 9% annual coupon-bearing debt with 20 warrants per $1,000 face valuebond. Storm has 10 million shares of stock outstanding at a current price of $25. The warrantscan be exercised in 10 years (on December 31, 2028) at an exercise price of $30. Eachwarrant entitles its holder to buy one share of Storm Software stock. After issuing the bondswith warrants, Storm’s operations and investments are expected to grow at a constant rateof 11.4% per year.a. If investors pay $1,000 for each bond, what is the value of each warrant attached to thebond issue?b. What is the component cost of these bonds with warrants? What premium is associatedwith the…
Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds with a face value of $1000 and a coupon rate
of 6.5% (annual payments). The following table summarizes the YTM for similar ten-year corporate bonds of various credit ratings:
Rating AAA AA A ВВВ
BB
YTM 6.6% 6.8% 6.9% 7.3% 7.8%
Assuming that Luther's bonds receive a AAA rating, the number of bonds that Luther must issue to raise the needed $25 million is closest to:
OA. 30,216
B. 25180
OC. 35,252
OD. 20,144
Chapter 20 Solutions
Fundamentals of Financial Management (MindTap Course List)
Ch. 20 - Prob. 1QCh. 20 - You are told that one corporation just issued SI00...Ch. 20 - One often finds that a companys bonds have a...Ch. 20 - Prob. 4QCh. 20 - Distinguish between operating leases and financial...Ch. 20 - One alleged advantage of leasing voiced in the...Ch. 20 - Prob. 7QCh. 20 - Prob. 8QCh. 20 - Prob. 9QCh. 20 - Prob. 10Q
Ch. 20 - Evaluate the following statement: Issuing...Ch. 20 - Suppose a company simultaneously Issues 50 million...Ch. 20 - LEASING Cordell Construction needs a piece of...Ch. 20 - WARRANTS Rubash Company recently issued two types...Ch. 20 - CONVERTIBLES Whiston Securities recently issued...Ch. 20 - BALANCE SHEET EFFECTS OF LEASING Two textile...Ch. 20 - Prob. 5PCh. 20 - Prob. 6PCh. 20 - CONVERTIBLES In the summer of 2018, the Gallatin...Ch. 20 - LEASE ANALYSIS As part of its overall plant...Ch. 20 - Prob. 12SPCh. 20 - FISH CHIPS INC, PART I LEASE ANALYSIS Martha...Ch. 20 - Prob. 14IC
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- (Cost of debt) Sincere Stationery Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 10 percent with interest paid semiannually and a 10-year maturity. Investors require a rate of return of 9 percent. a. Compute the market value of the bonds. b. How many bonds will the firm have to issue to receive the needed funds? c. What is the firm's after-tax cost of debt if the firm's tax rate is 34 percent?arrow_forward(Cost of debt) Gillian Stationery Corporation needs to raise $610,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 7.9 percent with interest paid semiannually and a 15-year maturity. Investors require a rate of return of 10.7 percent. a. Compute the market value of the bonds. b. How many bonds will the firm have to issue to receive the needed funds? c. What is the firm's after-tax cost of debt if the firm's tax rate is 34 percent? a. The market value of the bonds is $ (Round to the nearest cent.) b. The number of bonds that the company needs to sell isbonds. (Round up to the nearest integer.) c. The firm's after-tax cost of debt is. (Round to two decimal places)arrow_forwardStuck on this question. Long-term Borrowing Company (LBC) is raising new capital by selling bonds. Its investment bankers have estimated that if the company sets the coupon rate for the new bonds at 8% paid semiannually, it can sell them in the market for $1,102 per bond. The new bonds will have 15 years to maturity. The bankers have estimated that the cost of selling the new bonds will be $25 per bond. What is the company’s after-tax cost of new debt for this new financing if its tax rate is 30 percent? I see in another solution that the before tax cost of debt is 7.1546%. I don't understand the calculation to get that percentage.arrow_forward
- Airbutus Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 8% coupon bonds on the market that sell for $930, make semiannual payments, and mature in 20 years. What coupon rate should the company set on its new bonds if it wants them to sell at par? How can I solve it with financial calculator method?arrow_forwardThings Get Messi Enterprises is issuing new bonds for a capital budgeting project. The bonds will have 25.00 year maturities with a coupon rate of 6.50% APR with semi - annual coupon payments (assume a face value of $1,000 on the bond). The current market rate for similar bonds is 5.24% APR. The company hopes to raise $38.00 million with the new issue. Based on the current market rate, what will a new bond sell for?arrow_forwardTo make its bond offering attractive to investors, Creamy Crisp is attaching warrants. The bonds will have a 30-year maturity and semi-annual interest payments. Each bond will come with 15 warrants that give the holder the right to purchase one share of stock per warrant. The investment bankers estimate that each warrant will have a value of $10.00. A similar straight-debt issue would require a 9% per year yield. What annualized coupon rate should be set on the bonds-with-warrants so that the package would sell for $1,000? 7.64% per year O 3.77% per year O 3.58% per year O 7.55% per year O 8.42% per year 0730 4arrow_forward
- Corso Inc. wants to raise $10 million by issuing 15-year zero coupon bonds with a face value of $1,000. Their investment banker informs them that investors would use a 11.25% discount rate on such bonds. At what price would these bonds sell in the market place assuming semiannual compounding? How many bonds would the firm have to issue to raise $10 million?arrow_forwardFINANCIAL RISK MANAGEMENT Suppose a borrower, Syarikat ABC, has a 5-year, RM 10 million loan from Maybank. Maybank charges an interest based on 6-month KLIBOR + 2% payable semiannually. The firm’s funding costs will increase as 6-month KLIBOR rises. How can the firm hedge? PLEASE SHOW ANSWER STEP BY STEP.arrow_forwardThe Moonlight Mile Corporation wants to issue $1,000,000 of new bonds. Their bonds will have a coupon rate of 8% paid semiannually, will have 30 years to maturity, will have a par value of $1,000, and have a yield to maturity of 7%. How many bonds should Moonlight Mile sell in order to raise $1,000,000arrow_forward
- For Yo Brows (-) Radio Library The International Publishing Group is raising $10 million by issuing 15-year bonds with a coupon rate of 7.8 percent. Coupon payments will be made annually. Investors buying the bonds today will earn a yield to maturity of 7.8 percent. The Face Value of each bond is $1,000. At what price will the bonds sell in the marketplace? Sale value $ LAarrow_forwardYour company wants to raise $8.5 million by issuing 10-year zero-coupon bonds. If the yield to maturity on the bonds will be 5% (annual compounded APR), what total face value amount of bonds must you issue? The total face value amount of bonds that you must issue is $. (Round to the nearest cent.) View an example Get more help. Ⓒ % 5 G B 6 Y H MacBook Pro N & 7 U J * 8 M K ( 9 * < 0 XE ✪ Clear all ✔ 1 Check answer delete rearrow_forwardCopdog Airbutus co. wants to issue new 20-year bonds for some much needed expansion projects. the company currently has 8% coupon bonds on the market that sell for $930, make semiannual payments , and mature in 20 years. what coupon rate should the company set on its new bonds if it wants them to sell at par?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education