TWA is considering whether to raise $1 billion by issuing a unit consisting of $1 billion- 7.5%-10 year subordinated debentures ($1,000 face value each) and the number of physical detachable warrants is 14.71, and each one entitlles the holder to purchase a share of TWA for $68 payable in cash or by surrendering the bonds.

The warrants would expire in 5 years. Alternatively, TWA is able to issue $500 million of straight subordinated debentures at par with a 13.25% coupon. Issue fees would be 0.75% of principal amount in each case.

The following information is available to TWA::

Yield on a 5 year government note 11.4%

TWA stock price $47

TWA stock return volatility is 54%

TWA common shares outstanding 117.2 million

Please show all work in arriving at your answer.

i. What price would the 7.5% debentures trade for without the warrants?

ii. What is the value of the warrants?