3. Warrants Warrants are long-term options to buy a stated number of common shares at a specified price that is generally attached to debt issues. Warrants are attached to debt in hopes of enticing investors to buy lower-coupon, long-term debt, because warrants give investors the chance to profit from the firm's upside potential. Warrants are like long-term: Call options Put options Spandust Industries Inc. is issuing new seven-year bonds with 19 warrants attached to each $1,000 par value bond. Spandust Industries Inc. wanted to issue the bonds at par, but a straight-debt bond (without warrants) would have required a 14.20% coupon rate. Instead, the attached warrants allow Spandust Industries Inc. to issue the bonds at par with a 8.52% coupon. Select the straight value of the bond and the value of each warrant in the following table. (Note: Assume that the company pays annual coupons.) What is the straight value of the bond? What is the value of each warrant? Value Which kind of firm is more likely to issue bonds with attached warrants-large, mature firms or small, fast-growing firms? O Small, fast-growing firms Large, mature firms
3. Warrants Warrants are long-term options to buy a stated number of common shares at a specified price that is generally attached to debt issues. Warrants are attached to debt in hopes of enticing investors to buy lower-coupon, long-term debt, because warrants give investors the chance to profit from the firm's upside potential. Warrants are like long-term: Call options Put options Spandust Industries Inc. is issuing new seven-year bonds with 19 warrants attached to each $1,000 par value bond. Spandust Industries Inc. wanted to issue the bonds at par, but a straight-debt bond (without warrants) would have required a 14.20% coupon rate. Instead, the attached warrants allow Spandust Industries Inc. to issue the bonds at par with a 8.52% coupon. Select the straight value of the bond and the value of each warrant in the following table. (Note: Assume that the company pays annual coupons.) What is the straight value of the bond? What is the value of each warrant? Value Which kind of firm is more likely to issue bonds with attached warrants-large, mature firms or small, fast-growing firms? O Small, fast-growing firms Large, mature firms
Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
8th Edition
ISBN:9781285065137
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter8: Risk And Rates Of Return
Section: Chapter Questions
Problem 9Q: In Chapter 7, we saw that if the market interest rate, rd, for a given bond increased, the price of...
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Transcribed Image Text:3. Warrants
Warrants are long-term options to buy a stated number of common shares at a specified price that is generally attached to debt issues.
Warrants are attached to debt in hopes of enticing investors to buy lower-coupon, long-term debt, because warrants give investors the chance to profit
from the firm's upside potential. Warrants are like long-term:
O Call options
Put options
Spandust Industries Inc. is issuing new seven-year bonds with 19 warrants attached to each $1,000 par value bond. Spandust Industries Inc. wanted
to issue the bonds at par, but a straight-debt bond (without warrants) would have required a 14.20% coupon rate. Instead, the attached warrants
allow Spandust Industries Inc. to issue the bonds at par with a 8.52% coupon. Select the straight value of the bond and the value of each warrant in
the following table. (Note: Assume that the company pays annual coupons.)
What is the straight value of the bond?
What is the value of each warrant?
Value
Which kind of firm is more likely to issue bonds with attached warrants-large, mature firms or small, fast-growing firms?
Small, fast-growing firms
Large, mature firms
Transcribed Image Text:Consider the following statement about warrants:
Warrants are sweeteners because they add a special benefit to a debt instrument that increases its marketability and lowers interest
rates.
True or False:
False
True
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