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Assume the firm's stock now sells for $20 per share. The company wants to sell some 20 year, annual interest,$1,000 par value bonds. Each bond will have 50 attached warrants, each exercisable into 1 share of stock at an exercise price of $25. The firm's straight bonds yield 12%. Assume that each warrant will have a market value of $3 when the stock sells at $20.

Required: What coupon interest rate, and dollar coupon, must the company set on the bonds with warrants if they are to clear the market?

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