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On January 1, 2019, Langdon & Co. issues bonds with a face value of $50,000 for $51,000. Each $1,000 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.

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jepessoa

Answer:

$48,548 to be assigned to the bonds, and $2,452 to the warrants

Explanation:

the value that should be assigned to the bonds is:

= [market value of bonds / (market value of bonds without warrants + market value of warrants)] x price at issuance

market value of bonds = 99 ex rights x 1,000 = $990

market value of warrants = $5 x 10 = $50

issuance price = $51,000

= [$990 / ($990 + $50)] x $51,000 = ($990 / $1,040) x $51,000 = 0.951923 x $51,000 = $48,548.08 ≈ $48,548

the value assigned to the warrants = $51,000 - $48,548 = $2,452

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