Problem:

Reynolds Industries is planning to issue bonds with warrants. The bonds will have a 30-year maturity and annual interest payments. Each bond will come with 20 warrants that give the holder the right to purchase one share of stock per warrant. The investment bankers estimate that each warrant will have a value of $10.00. A similar straight-debt issue would require a 10% coupon.

Required:

Question: What coupon rate should be set on the bonds-with-warrants so that the package would sell for $1,000?

A.) 6.75%

B.) 7.11%

C.) 7.48%

D.) 7.88%

E.) 8.27%

Note: Show supporting computations in good form.