Paper , Order, or Assignment Requirements

(TCO F) Warren Corporation’s stock sells for $42/share. The company wants to sell some 20-year annual interest, $1000 par value bonds. Each bond would have 75 warrants attached to it, each exercisable into 1 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 amount must the company set on the bonds in order to sell the bonds-with–warrants at par?

a) 7.83%

b) 8.24%

c) 8.65%

d) 9.08%

e) 9.54%

(TCO E) Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 10% and the loan would be amortized over the truck’s 4-year life. The loan payments would be made at the end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $10,000. If DTC buys the truck, its after tax cash flows would be the following: Year 1: $6,339; Year 2: -4,764; Year 3: -9,943; Year 4: -5,640 all occurring at the end of their respective years. The lease terms call for a $10,000 lease payment (4 payments total) at the beginning of each year. DTC’s tax rate is 40%. Should the firm lease or buy?

a) $849

b) $896

c) $945

d) $997

e) $1,047