Question 1: A warrant is a long-term optionfrom a company that gives the holder the right to buy a statednumber of shares of the firm’s stock at a specified price for aspecified length of time. Generally, warrants are distributed withdebt, and they are used to induce investors to buy long-term debtthat carries a lower coupon rate than would otherwise be required.The exercise of warrants brings in additional funds to thefirm.

A corporation decides to issue 10-year bonds to fund a necessaryexpansion. If they were straight bonds, they would carry a 9%annual coupon. However, the bonds with warrants can be sold with an8% coupon. Thus, investors would be paying $700 in return for the8% coupon, 10-year bond and 16 warrants.

What is the price of the 8% coupon bonds? Do not roundintermediate calculations. Round your answer to the nearestcent.

_____________

Question 2: A warrant is a long-term optionfrom a company that gives the holder the right to buy a statednumber of shares of the firm’s stock at a specified price for aspecified length of time. Generally, warrants are distributed withdebt, and they are used to induce investors to buy long-term debtthat carries a lower coupon rate than would otherwise be required.The exercise of warrants brings in additional funds to thefirm.

A corporation decides to issue 10-year bonds to fund a necessaryexpansion. If they were straight bonds, they would carry a 7%annual coupon. However, the bonds with warrants can be sold with a5% coupon. Thus, investors would be paying $1,100 in return for the5% coupon, 10-year bond and 20 warrants.

What is the total value of the warrants and the value of eachwarrant? Do not round intermediate calculations. Round your answersto the nearest cent.

Value of each warrant is _________

Value of the warrants in total _________

Question 3: A warrant is a long-term optionfrom a company that gives the holder the right to buy a statednumber of shares of the firm’s stock at a specified price for aspecified length of time. Generally, warrants are distributed withdebt, and they are used to induce investors to buy long-term debtthat carries a lower coupon rate than would otherwise be required.The exercise of warrants brings in additional funds to thefirm.

A corporation decides to issue 10-year bonds to fund a necessaryexpansion. If they were straight bonds, they would carry a 9%annual coupon. However, the bonds with warrants can be sold with an8% coupon. Thus, investors would be paying $900 in return for the8% coupon, 10-year bond and 22 warrants.

Suppose that the warrants expire in 5 years, and the exerciseprice on the warrants is $10. (Remember that each bond includes 22warrants.) The firm’s current stock price is $8.00, but the priceis expected to grow by 13% per year. Assuming that the warrantswill not be exercised prior to expiration, what is the overall rateof return to investors? Do not round intermediate calculations.Round your answer to one decimal place.

___________%