Five years ago, in conjunction with a financial restructuring, Laurenberg Electric sold a $100 million issue of bonds at a coupon interest rate of 12 percent Each bond came with 30 detachable warrants Each warrant entitled the holder to purchase one share of Laurenbergs common stock at $15 per shar...

a Because the exercise price on the warrant exceeds the stock pr ...

Five years ago, in conjunction with a financial restructuring, Laurenberg Electric sold a $100 million issue of

Question:

Five years ago, in conjunction with a financial restructuring, Laurenberg Electric sold a $100 million issue of bonds at a interest rate of 12 percent. Each bond came with 30 detachable warrants. Each warrant entitled the holder to purchase one share of Laurenberg’s at $15 per share. The warrants were set to expire 25 years from the date of issue. When Laurenberg’s stock sold for $7 per share, the value of a warrant in the marketplace was $0.50.
a. What is the formula value of each warrant under these conditions?
b. What factors influence this value?
At a stock price of $15, the market price of each warrant was $3.At a stock price of $20, the market price of each warrant was $6.50. At a stock price of $25, the market price of each warrant was $10.50.
c. If an investor purchases the stock and the warrant when the stock price is $15, what rate of return will be earned on both, assuming that the stock and the warrant are sold when the stock price reaches $20?
d. If an investor purchases the stock and the warrant when the stock price is $20, what rate of return will be earned on both, assuming that the stock and the warrant are sold when the stock price reaches $25?
e. What happens to the rate of return from the warrant as the stock price rises? Why do you think this happens?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...