Question

Vernon Corporation offered detachable 5-year warrants to buy one share of common stock (par value $5) at $20. The price paid for 800, $1,000 bonds with the warrants attached was $820,000. The market price of the Vernon bonds without the warrants was $720,000, and the market price of the warrants without the bonds was $80,000. What amount should be allocated to the warrants?

Answer 1

Answer:

The correct answer is $82,000.

Explanation:

According to the scenario, the given data are as follows:

Bonds with Warrants = $820,000

Market price of Bonds without warrants = $720,000

Market Price of Warrants without bonds = $80,000

So, we can calculate the amount that should be allocated to warrants by using following following formula:

Warrant Amount = [Market Price of Warrants ÷ ( Market Price of Warrants + Market price of Bonds)] × Bonds with Warrants

So, by putting the value we get

Warrant amount = [ $80,000 ÷ ( $80,000 + $720,000)] × $820,000

= 0.1 × $820,000

= $82,000