McGovern Enterprises is interested in issuing bonds with warrants attached. The bonds will have a 30-year maturity and annual interest payments. Each bond will come with 20 warrants that give the holder the right to purchase one share of stock per warrant. The strike price on the warrants is $15 and 5 years until expiration. The invesment bankers estimate that each warrant will have a value of $8.75. A similar straight-debt issue would require a 10% coupon. Assume McGovern Enterprises has 10 million shares today, with cost of stocks of 15.7%. Also assume that the value of operations is currently $350 million and is expected to grow at a rate of 6% per year
1. What coupon rate should be set on the bonds-with-warrants so that the package would sell for $1,000?
2. If the warrant is exercised, will the firm recieve new cash proceeds? If so, how much?
3. What should be the stock price after the warrants are exercised.