Concept explainers
a.
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.
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.
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.
To Determine: The annual coupon interest rate and annual dollar coupon on the bonds.
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Chapter 20 Solutions
Fundamentals of Financial Management (MindTap Course List)
- On january 1, 2022, a company issued P2,000,000, 16% bonds at 102. Each P1,000 bonds has one detachable warrant that allows the holder to purchase ten shares of P50 par value stock at P70 per share. The bonds would have been sold at 99 without the warrants. In 2023, 800 warrants were exercised. How much is the credit to share premium when the warrants were exercised?arrow_forwardAcme stock price is currently $10 per share. Acme's warrants have a price of $7 per warrant. Each warrant enables the holder to purchase three shares of Acme's common stock for $8 per share. What is the speculative premium on the warrant? and Suppose that an investor buys a 100-share call option for $250. It has an exercise price of $60. The underlying price per share of the stock at expiration is $66. What then is the amount of profit or loss, ignoring brokerage fees?arrow_forward22 A dealer in securities has the following for the year 2018: Sale of securities held for sale in the ordinary course P4,000,000 Cost of securities held for sale in the ordinary course 2,500,000 Supplies expense, net of VAT 300,000 Rent expense, net of VAT 500,000 The Vat payable shall be:arrow_forward
- A company issues 1,000 bonds, each with a face value of $1,000, for $1.1 million. Each bond has a detachable warrant that allows the holder to purchase common stock for $20 per share. The market value of the bonds without the warrants is $950,000. The fair market value of the warrants is $50,000.How much should the company record as the value of the warrants?arrow_forward10 A dealer in securities has the following for the year 2018: Sale of securities held for sale in the ordinary course P4,000,000 Cost of securities held for sale in the ordinary course 2,500,000 Supplies expense, net of VAT 300,000 Rent expense, net of VAT 500,000 The OUTPUT VAT shall be:arrow_forwardHong Corporation issues P500,000, 20 percent, 120-day commercial paper. However, the funds are needed for only 90 days. The excess funds can be invested in securities earning 19 percent. The brokerage fee for the marketable security transaction is 1.0 percent. What is the net cost to the company for issuing the commercial paper? choose the letter of the correct answera. P10,416.00b. P15,416.00c. P20,416.00d. P25,416.00e. P30,416.00arrow_forward
- Cataloochee Inc. issues bonds, each with one detachable warrant, for $392,000. The bonds are 400, $1,000 6% bonds and they trade at 97 without the warrants. On the day of issue, the fair value of the stock is $45 and the par value is $1. The strike price of the warrants is $25. What is the amount of the entry to record the Stock Warrants?arrow_forwardSunshine Financial buys and sells securities which it classifies as available-for-sale. On July 1, 2021, S&L purchased Coca-Cola bonds at par for $55,000. On December 31, 2021, the bonds had a fair value of $59,000. On December 31, 2022, the bonds had a fair value of $58,000. On January 3, 2023, sold the bonds for $58,500. Prepare all necessary journal entries on January 3, 2023.arrow_forwardBank A issues a bond with a maturity of 3 years, par value of $1,000,000, and annual coupon rate of 2%. Company B buys this bond at date 0. 1. in this situation, who lends money and who borrows money? 2. what are the cash flows received by B if it decides to hold the bond until maturity?arrow_forward
- A company issued $400,000 of 7% bonds at 102. One detachable stock warrant entitling the holder to purchase one share of common stock was attached to each $1,000 bond. On the day of this issuance, the bonds without the warrants would sell at 95, the fair value of the warrant was $300 per warrant. How much Discount/Premium on Bonds Payable should be recorded for this issuance? (Just enter an amount. Do not put a plus or minus sign in front of the amount.)arrow_forward1.Gassy Stores sells $400,000 of 12% bonds on June 1, 2022. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2026. The market rate of similar investments is 10%. On December 1, 2024, Gassy Stores retired the bond for $400,000. The company closes its books on December 31. Requirements: (Show all workings) A.Calculate the proceeds from the sale of the bond. Clearly show the amount of the premium or discount and state two reasons which support the premium or discount calculated. B.Prepare a bond amortization schedule for the bond’s life C.Prepare all the journal entries for 2022, 2023 & 2024.arrow_forwardFor each of the unrelated transactions described below, present the entry(ies) required. (a) Partially correct answer iconYour answer is partially correct. Sweet Company issued $11,000,000 par value 5% bonds at 97. One detachable stock purchase warrant was issued with each $100 par value bond. At the time of issuance, the warrants were selling for $2.arrow_forward
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