Emerson Electrical Engineering Inc. is issuing new 20-year bonds that have warrants attached. If not for the attached warrants, the bonds would carry a 12.0% interest rate. However, with the warrants attached the bonds will pay a 10.0% annual coupon. There are 22 warrants attached to each bond, which have a par value of $1,000. The exercise price of the warrants is $23.00, and the expected stock price 10 years from now (when the warrants may be exercised) is $47.87. What is the investor's expected overall pre-tax rate of return for this bond-with-warrants issue? Do not round your intermediate calculations.
A. 14.19%
B. 9.26%
C. 12.34%
D. 9.87%
E. 11.11%
Answer: C
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