Given the following case, answer questions 14 to 16 below:
Morina Resto. is family owned restaurant chain established 10 years ago in Rome, Italy.
It currently has 5 million shares outstanding. Although Morina Resto. has done well,
the firm's founder believes that an industry shakeout is imminent. To survive, Morina
Resto. must grab market share now, and this will require a large infusion of new capital.
Mr. Georges Morina, the Chief Executive Officer (CEO), expects earnings to continue
rising sharply and looks for the stock price to follow suit, thus, he does not think it
would be wise to issue new common stock at this time. On the other hand, interest rates
are currently high by historical standards, the interest payments on a new debt issue
would be prohibitive. Therefore, he has chosen to finance the needed capital using
bonds with warrants.
Mr. Morina estimates that Morina Resto. could issue 100,000 bonds-with-warrants
packages consisting of a 20-year bond and 30 warrants. Each warrant would have a
strike price of $29 and 15 years until expiration. It is estimated that each warrant, when
detached and traded separately, would have a value of $5. The coupon on a similar
bond but without warrants would be 10%.
14. What coupon rate should be set on the bond with warrants if the total
package is to sell for $1,000? *
? 7.52%
8.23%
8.03%
9.52%
None of the above
15. How much cash will Morina Resto. receive when the warrants are exercised? *
$50.23 million
$65.32 million
$29.00 million
$87.00 million
None of the above
16. How many shares of stock will be outstanding after the warrants are
exercised? *
3 million shares
3.5 million shares
5.8 million shares
8 million shares
? None of the above
