Curry Corporation is setting the terms on a new issue of bonds with warrants. Th

Question

Curry Corporation is setting the terms on a new issue of bonds with warrants. The bonds will have a 30-year maturity and annual interest payments. Each bond will come with 20 warrants that give the holder the right to purchase one share of stock per warrant at a price of $35 (the current price of the stock today). The investment bankers estimate that each warrant will have a value of $10.00. A similar straight-debt issue would require a 10% coupon.
a. What coupon rate should be set on the bonds-with-warrants so that the package would sell for $1,000?
b. If the stock price rises by 5% per year and the convertibles are exercised after 10 years, what is the cost to the company of the bonds plus warrants package? Curry Corporation is setting the terms on a new issue of bonds with warrants. The bonds will have a 30-year maturity and annual interest payments. Each bond will come with 20 warrants that give the holder the right to purchase one share of stock per warrant at a price of $35 (the current price of the stock today). The investment bankers estimate that each warrant will have a value of $10.00. A similar straight-debt issue would require a 10% coupon.
a. What coupon rate should be set on the bonds-with-warrants so that the package would sell for $1,000?
b. If the stock price rises by 5% per year and the convertibles are exercised after 10 years, what is the cost to the company of the bonds plus warrants package?

Explanation / Answer

Value of 20 warrants = $10.00 * 20 = $200.00

Present value of debt portion = $1,000 - $200.00 = $800.00
Rate = 10%

Period = 30 years
Future Value = 1,000
PMT(0.1,30,-800,1000) yields 78.78
Coupon rate = 78.78 / 1,000 = 0.07878 or 7.88%

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