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4. Which of the following statements concerning warrants is correct? * Given the following information for QLB & Co., answer questions 1, 2, and 3 below: 1. If QLB & Co. had purchased the machine, it would have which of the following balance sheets? * 2. Assume that the lease is not capitalized, what would be the change in debt ratio? Warrants are long-term put options that have value because holders can sell the firm's common stock at the exercise price regardless of how low the market price drops. O 0% O (11.23%) Warrants are long-term call options that have value because holders can buy the firm's common stock at the exercise price regardless of how high the stock's price has risen QLB & Co. needs a new machine that costs $1,200,000. It can either purchase it or lease it. If it chooses to purchase it, it will take a 5-year simple loan at 8% before tax interest rate. If it chooses to lease it, it will incur an annual end-of-year lease payment of $350,000 for 5 years. Balance Sheet of QBL & Co. (after purchase) Assets Liabilities and Equity Current assets 1,350,000 Debt $3,970,000 Fixed assets 4,590,000 Equity $1,970.000 Total assets $5,940,000 Total liabilities and equity $5,940,000 5.57% A firm's investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders. a. O 6.25% O None of the above Assume that the machine's expected life is 5 years and that it is depreciated using straight line method. The tax rate is 35%. Balance Sheet of QBL & Co. (after purchase) Assets Liabilities and Equity Current assets 1,350,000 Debt $5,170,000 Fixed Assets 5,790,000 Equity $1,970,000 Total assets $7,140,000 Total liabilities and equity S7,140,000 Bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock's price increases. However, if the option is exercised, the issuing company's debt declines if warrants were used but remains the same if it used convertibles. b. The following is QLB & Co. balance sheet prior to purchasing or leasing the machine: 3. What is the company's cost of owning the machine?* Balance Sheet of QBL & Co. (31/12/2019) O ($745,629.74) Balance Sheet of QBL & Co. (after purchase) Assets Liabilities and Equity Current assets 1,350,000 Debt $3,970,000 Fixed assets 5,790,000 Equity $3,170,000 Total assets $7,140,000 Total liabilities and equity $7,140,000 5. The common stock of Southern Airlines is expected to grow at 7% annually. Its expected stock price after 5 years is $47.687. Currently, the firm has 8% convertible debentures (issued at par, or $1.000) that sells for $850. Each debenture can be converted into 25 shares of common stock at any time before 2025. What is the current conversion value of the bond? O $619,875.62 Assets Liabilities and Equity O ($838,325.83) Current assets $1,350,000 Debt $3,970,000 O $925,841.53 $707.33 Balance Sheet of QBL & Co. (after purchase) Assets Liabilities and Equity Current assets 2,550,000 Debt $5,170,000 Fixed assets 4.590.000 Equity $1,970,000 Total assets $7,140,000 Total liabilities and equity $7,140,000 O O Fixed Assets $4,590,000 $1,744.56 Equity O None of the above $1,970,000 $1,672.08 d. Total assets $5,940,000 Total liabilities and equity $5,940,000 O $825.00 a O None of the above OOO b d. O None of the above

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