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

Jacobs Company has warrants outstanding, which are selling at a $2.50 premium above intrinsic value. Each warrant allows its owner to purchase one share of common stock at $26. If the common stock currently sells for $30, what is the warrant price? A. $6.50 B. $6.40 C. $6.75 D. $7.25

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.

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.

c.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the (1) the life of warrant in lengthened, (2) the expected variability in stock's price decrease, (3) the growth rate in the stock's EPS increase and (4) when the company paid no dividends and will pay out all earnings as dividends.

d.

Summary Introduction

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

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Jacobs Company has warrants outstanding, which are selling at a $2.50 premium above intrinsic value. Each warrant allows its owner to purchase one share of common stock at $26. If the common stock currently sells for $30, what is the warrant price? A. $6.50 B. $6.40 C. $6.75 D. $7.25

Maese Industries Inc. has warrants outstanding that permit the holders to purchase 1 share of stock per warrant at a price of $28. a. Calculate the exercise value of a warrant at each of the following common stock prices: (1) $20, (2) $25, (3) $30, (4) $100. (Hint: A warrant's exercise value is the difference between the stock price and the purchase price specified by the warrant if the warrant were to be exercised.) If your answer is zero, enter "0". Round your answers to the nearest dollar. (1) $20 $ 0 (2) $25 $ 0 (3) $30 $ (4) $100 $ 2 72 b. Assume the firm's stock now sells for $20 per share. The company wants to sell some 20-year, $1,000 par value bonds with interest paid annually. Each bond will have attached 75 warrants, each exercisable into 1 share of stock at an exercise price of $25. The firm's straight bonds yield 11%. Assume that each warrant will have a market value of $2.5 when the stock sells at $20. What coupon interest rate must the company set on the bonds with…

Maese Industries Inc. has warrants outstanding that permit the holders to purchase 1 share of stock per warrant at a price of $25. a. Calculate the exercise value of a warrant at each of the following common stock prices: (1) $20, (2) $25, (3) $30, (4) $100. (Hint: A warrant’s exercise value is the difference between the stock price and the purchase price specified by the warrant if the warrant were to be exercised.) b. Assume the firm’s stock now sells for $20 per share. The company wants to sell some 20-year, $1,000 par value bonds with interest paid annually. Each bond will have attached 50 warrants, each exercisable into 1 share of stock at an exercise price of $25. The firm’s straight bonds yield 12%. Assume that each warrant will have a market value of $3 when the stock sells at $20. What coupon interest rate, and dollar coupon, must the company set on the bonds with warrants if they are to clear the market? (Hint: The convertible bond should have an initial price of $1,000.)

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.

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.

c.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the (1) the life of warrant in lengthened, (2) the expected variability in stock's price decrease, (3) the growth rate in the stock's EPS increase and (4) when the company paid no dividends and will pay out all earnings as dividends.

d.

Summary Introduction

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

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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.

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.

c.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the (1) the life of warrant in lengthened, (2) the expected variability in stock's price decrease, (3) the growth rate in the stock's EPS increase and (4) when the company paid no dividends and will pay out all earnings as dividends.

d.

Summary Introduction

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

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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.

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.

c.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the (1) the life of warrant in lengthened, (2) the expected variability in stock's price decrease, (3) the growth rate in the stock's EPS increase and (4) when the company paid no dividends and will pay out all earnings as dividends.

d.

Summary Introduction

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

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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.

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.

c.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the (1) the life of warrant in lengthened, (2) the expected variability in stock's price decrease, (3) the growth rate in the stock's EPS increase and (4) when the company paid no dividends and will pay out all earnings as dividends.

d.

Summary Introduction

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

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.

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

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 9

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 10

c.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the (1) the life of warrant in lengthened, (2) the expected variability in stock's price decrease, (3) the growth rate in the stock's EPS increase and (4) when the company paid no dividends and will pay out all earnings as dividends.

Answer 11

c.

Summary Introduction

To Determine: The factors that affect the estimates of the warrants' prices and premium in part b when the (1) the life of warrant in lengthened, (2) the expected variability in stock's price decrease, (3) the growth rate in the stock's EPS increase and (4) when the company paid no dividends and will pay out all earnings as dividends.

Answer 12

d.

Summary Introduction

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

Answer 13

d.

Summary Introduction

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

Answer 14

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Answer 15

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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

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.

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

Chapter 20 Solutions