Fidelity Corporation, a rapidly growing motor sales company wishes to sell $50 million of 20-year bonds...

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Fidelity Corporation, a rapidly growing motor sales company wishes to sell $50 million of 20-year bonds in the year 2000. The company's investment bankers informed the financial vice-president that the bonds would be difficult to sell and that a coupon rate of 12%would be required. However as an alternative, the bankers suggested that investors might be willing to buy the bonds with a coupon rate of only 10% if the company would offer 20 warrants with each $1000 bond, each warrant entitling the holder to buy one share of common stock at an exercise price of $22.00 per share. In the year 2000, the stock sold for $20.00 per share and the warrants would expire in the year 2010 if they had not been previously exercised. What is the value of the warrant.? (12 marks)-Show all workings Part B Thompson's Enterprises is considering issuing a 20-year convertible bond that would be priced at its $1,000 par value. The bonds would have an 10.00% annual coupon. and each bond could be converted into 20 shares of common stock. The required rate of return on an otherwise similar nonconvertible bond is 12.00%. In the previous years the stock was sold for $60.00, however it currently sells for $40.00 a share, has an expected dividend in the coming year of $2.00, and has an expected constant growth rate of 6.00%. What is the estimated floor price of the convertible at the end of Year 5?(13 marks) Fidelity Corporation, a rapidly growing motor sales company wishes to sell $50 million of 20-year bonds in the year 2000. The company's investment bankers informed the financial vice-president that the bonds would be difficult to sell and that a coupon rate of 12%would be required. However as an alternative, the bankers suggested that investors might be willing to buy the bonds with a coupon rate of only 10% if the company would offer 20 warrants with each $1000 bond, each warrant entitling the holder to buy one share of common stock at an exercise price of $22.00 per share. In the year 2000, the stock sold for $20.00 per share and the warrants would expire in the year 2010 if they had not been previously exercised. What is the value of the warrant.? (12 marks)-Show all workings Part B Thompson's Enterprises is considering issuing a 20-year convertible bond that would be priced at its $1,000 par value. The bonds would have an 10.00% annual coupon. and each bond could be converted into 20 shares of common stock. The required rate of return on an otherwise similar nonconvertible bond is 12.00%. In the previous years the stock was sold for $60.00, however it currently sells for $40.00 a share, has an expected dividend in the coming year of $2.00, and has an expected constant growth rate of 6.00%. What is the estimated floor price of the convertible at the end of Year 5?(13 marks)

Answer rating: 100% (QA)

a To calculate the value of the warrant we need to use the BlackScholes option pricing model C S x N... View the full answer