Warren Corporation’s stock sells for $42 per share. The company wants to sell some 20-year, annual...

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Warren Corporation’s stock sells for $42 per share. The company wants to sell some 20-year, annual interest, $1,000 par value bonds. Each bond would have 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm’s straight bonds yield 10%. Each warrant is expected to have a market value of $2.00 given that the stock sells for $42. What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par?
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Dear Tutors: I have a test tomorrow. Is my final exam for Advanced Corporate Finance and I need an A (280 full points ) to pass. It covers the following topics: -chapter 23 Derivatives and Risk Management -chapter 24 Portfolio theory asset pricing models, behavioral finance-chapter 25 Real Options -chapter 26 Analysis of Capital Structure Theory-chapter 27 Providing and Obtaining Credit -chapter 28 Advanced Issues in Cash Management and Inventory Control -chapter 29 Pension Plan Management -chapter 30 Financial Management in Not-for-Profit Businesses of brigham/ehrhardt financial management 13th edition The format of the test is multiple choice, online, 35 questions (between theory and calculations) and most importantly it needs to be resolved in 2.5 hours. Here are sample questions Question 20 0 out of 8 points New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year bond issue that was issued 5 years ago. It has been amortizing $3 million of flotation costs on these bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today's market. A call premium of 14% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called. What is the required after-tax refunding investment outlay, i.e., the cash outlay at the time of the refunding? AnswerSelected Answer: $5,595,500Correct Answer: $6,200,000 Question 21 0 out of 8 points Warren Corporation’s stock sells for $42 per share. The company wants to sell some 20-year, annual interest, $1,000 par value bonds. Each bond would have 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm’s straight bonds yield 10%. Each warrant is expected to have a...

005_0x3t8zk-hrfyhunl.doc

Robert · Accepted Answer

Answer 1)  
The expected return on Stock A should be greater than that on Stock B. 
Answer 2)  
Under MM with corporate taxes, the effect of business risk is automatically incorporated 
because rsL is a function of rsU. 
Answer 3) 
For a given D/S, the WACC is less than the WACC under MM’s original (with tax) 
assumptions. 
Answer 4) 
An increase in the cost of obtaining the real option. 
Answer 5)  
A;B 
Answer 6)  
Risk management can reduce the expected cost of financial distress 
Answer 7) 
In managing the retiree portfolio, fund managers often use immunization techniques such as 
alpha analysis to eliminate or at least significantly reduce the risk 
Answer 8) 
The typical R^2 for a stock is about 0.3 and the typical R^2 for a large portofolio is about 
0.94. 
Answer 9)  
The expected rate of return must be equal to the required rate of return; that is 
Answer 10)  
Beta; variance 
Answer 11)  
   In a defined contribution plan, the employer must make larger-than-average 
contributions to the pension plan when investment returns have been below 
expectations. 
Answer 12) 
A defined contribution plan is, in effect, a savings plan that is funded by employers, although 
many plans also permit additional contributions by employees.

Warren Corporation’s stock sells for $42 per share. The company wants to sell some 20-year, annual interest, $1,000 par value bonds. Each bond would have 75 warrants attached to it, each exercisable...

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