Emerson Electrical Engineering Inc

Multiple Choice

Emerson Electrical Engineering Inc.is issuing new 20-year bonds that have warrants attached.If not for the attached warrants,the bonds would carry an 11% interest rate.However,with the warrants attached the bonds will pay a 9% annual coupon.There are 25 warrants attached to each bond,which have a par value of $1,000.The exercise price of the warrants is $25.00 and the expected stock price 10 years from now (when the warrants may be exercised) is $50.77.What is the investor's expected overall pre-tax rate of return for this bond-with-warrants issue?

A) 10.64%
B) 11.20%
C) 11.79%
D) 12.38%
E) 13.00%