3. RE. 14-11
Bonds with Detachable Warrants
Langdon & Co. issues bonds with a face value of $50,000 for $51,000. Each $1,000
the bond carries 10 warrants, and each warrant allows the holder to acquire one share of $1
...
3. RE. 14-11
Bonds with Detachable Warrants
Langdon & Co. issues bonds with a face value of $50,000 for $51,000. Each $1,000
the bond carries 10 warrants, and each warrant allows the holder to acquire one share of $1
par common stock for $40 per share. Immediately after the issuance, the bonds are
quoted at 99 ex-rights, and the warrants are quoted at $5 each. Calculate the value to
be assigned to the bonds and to the warrants. Round your answers to two decimal
places.
The value assigned to bonds $48,548.08
The value assigned to warrants $2451.92
Feedback
You should allocate a portion of the proceeds of bonds issued with detachable warrants to the stock warrants. The
allocation is made as follows :
Amount Assigned to Bonds =
Market Value of Bonds Without Warrants
Market Value of Bonds Without Warrants + Market Value
of Warrants
X Issuance
Price
Amount Assigned to
Warrants =
Market Value of Warrants
Market Value of Bonds Without Warrants + Market Value
of Warrants
X Issuance
Price
Amount Assigned to Bonds + Amount Assigned to Warrants = Issuance Price
Market Value of bonds Without Warrant = ($1000 x 99%) x
$50,000/$1000 $49,500.00
Market Value of bonds With Warrant ($5 x $50000/$1000 x 10) $2,500.00
Issuance Price $51,000.00
Value assigned to bonds = (MV of Bonds without warrant /MV of
Bonds Without Warrant + MV of Bonds With warrant) x Issue price
Value assigned to bonds = ($49,500/($49500 + 2500)) x $51000 $48,548.08
Value assigned to Warrant = (MV of Bonds warrant /MV of Bonds
Without Warrant + MV of Bonds With warrant) x Issue price
Value assigned to Warrant = ($2500/($49500 + 2500)) x $51000 $2,451.92
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