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 warrants?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter6: Fixed-income Securities: Characteristics And Valuation
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Storm Software wants to issue $100 million in new capital to fund new
opportunities. If Storm raised the $100 million of new capital in a straight-debt 20-year
bond offering, Storm would have to offer an annual coupon rate of 12%. However, Storm’s
advisers 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 value
bond. Storm has 10 million shares of stock outstanding at a current price of $25. The warrants
can be exercised in 10 years (on December 31, 2028) at an exercise price of $30. Each
warrant entitles its holder to buy one share of Storm Software stock. After issuing the bonds
with warrants, Storm’s operations and investments are expected to grow at a constant rate
of 11.4% per year.
a. If investors pay $1,000 for each bond, what is the value of each warrant attached to the
bond issue?
b. What is the component cost of these bonds with warrants? What premium is associated
with the warrants?

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