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 the firms warrants if the common sells at each of the following prices: (1) $20, (2) $25, (3) $30, (4) $100.
b. At what approximate price do you think the warrants would actually sell under each condition indicated above? What premium above exercise value is implied in your price? Your answer is a guess, but your prices and premiums should bear reasonable relationships to one another. c. How would each of the following factors affect your estimates of the warrants prices and premiums in part b?
(1) The life of the warrant.
(2) Expected variability (σp) in the stocks price.
(3) The expected growth rate in the stocks EPS.
(4) The company announces a change in dividend policy: whereas it formerly paid no dividends, henceforth it will pay out all earnings as dividends.
d. Assume the firms stock now sells for $20 per share. The company wants to sell some 20-year, annual interest, $1,000 par value bonds. Each bond will have attached 50 warrants, each exercisable into 1 share of stock at an exercise price of $25. The firms straight bonds yield 12 percent.
Regardless of your answer to part b, 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?